“World War III” has been mentioned recently by both President Donald Trump and former Soviet leader, Mikhail Gorbachev.
That’s pretty frightening, if you ask me!
Mr. Gorbachev of course knows a thing or two about nuclear war. Between 1986 and 1988, he and U.S. President Ronald Reagan reached agreements to reduce each side’s cache of nuclear missiles. Shortly after, in 1991, the Soviet Union dissolved and the Cold War was ended – crisis averted!
Fast-forward 26 years and five U.S. presidents… and Mr. Gorbachev is once again worried. In an article he wrote for Time magazine, he said “It all looks as if the world is preparing for war… the nuclear threat once again seems real.”
And he makes no bones about who needs to step up (by stepping down) to stop it.
Speaking of his proposed UN Security Council resolution to guard against nuclear conflict, Gorbachev said: “I think the initiative should come from Donald Trump and Vladimir Putin – the presidents of two nations that hold over 90% of the world’s nuclear arsenals and therefore bear a special responsibility.”
Of course, neither Trump nor Putin seems to have any interest in reducing nuclear capability. Both have instead talked of strengthening their nuclear stances.
But I’m not here to talk geopolitics today.
I have my opinions, like everyone. And yes, I’m concerned about our future. But frankly, geopolitics is outside my wheelhouse of expertise. My guess at what could trigger the next global economic crisis – “World War III” or otherwise – is as good as anyone’s.
However, I DO know which investment strategy I’ll be going to war with… whenever, and wherever, calamity strikes.
That strategy is… trend-following!
Long-time readers know well my love affair with trend-following. I’ve written and talked about it for five years now. The trend-following philosophy underpins my Cycle 9 Alert service, which I’ve been running successfully since 2012. And I’ve incorporated trend-following principles into my latest market-timing model, which I’m currently sharing with early-access subscribers to my new service, Project V.
But the reason I’m talking about trend-following today – alongside warnings of “World War III” – is that it’s the ONLY strategy proven to provide protection (and profits) during times of extreme crisis.
And here’s the chart that proves it…
I’ve shown this chart before. It comes from an AQR white paper titled, A Century of Evidence on Trend-Following Investing. And it could be the only chart you need to consider, if you have some degree of suspicion that trouble lies ahead.
The chart shows the 10 worst performance periods for a conventional “60/40” portfolio (60% stocks; 40% bonds). The drawdowns of that 60/40 portfolio are shown above in purple.
As you can see, each of those periods of sharply negative performance coincided with notable financial or geopolitical events.
World War I…
The Great Depression…
The oil crisis…
The dot.com bubble…
The Great Financial Crisis…
Each of these major world events triggered significant losses in most investors’ portfolios – even the “conservative” portfolios that dutifully held 40% in bonds.
In contrast, the diversified trend-following strategy was not only immune to each crisis, it was able to provide strongly positive returns – acting as the perfect “crisis hedge” to traditional stocks-and-bonds portfolios.
During World War I, the 60/40 portfolio was down… and trend-following was up.
The same thing happened during the most recent Global Financial Crisis.
The trend-following strategy’s ability to provide strongly positive gains during times of crisis is perhaps its most notable and persistent feature.
Kathryn Kaminski – MIT Ph.D. and trend-following expert – coined the term “crisis alpha,” to describe the profit potential that trend-following uniquely provides during major, lasting crises.
Given the fact that the trend-following strategy has a 100-plus year track record of positive returns… and given it’s one of the only strategies I know that performs best in times of crisis… I’m convinced that a trend-following investment strategy will be the only place to hide during the next global crisis – whether that comes from a Chinese “hard landing,” a demographics-driven depression, or a nuclear-inspired “World War III.”
If you’re not a subscriber to Cycle 9 Alert or Project V, then another way to invest in a trend-following strategy is through a managed-futures mutual fund. The Guggenheim Managed Futures Strategy Fund (Nasdaq: RYMFX) is one of the biggest and longest-running funds readily available to retail investors.
But if you’re looking for a more hands-on approach, consider joining my Cycle 9 Alert service. My unique, sector-based approach to trend-following has worked quite well over the last five years. And since it’s built on the foundation of trend-following, I consider Cycle 9 Alert a “crisis-ready” strategy that’s a must-have in today’s tumultuous times.
Editor, Project V
Follow me on Twitter @InvestWithAdam
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