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North Korea: How to protect your portfolio in times of crisis


Last week, everyone held their breath while U.S. President Donald Trump and North Korean leader Kim Jong Un traded verbal fireworks.

The president threatened to rain fire and fury the like of which the world has at no time seen onto the rogue national. Not to be outdone, the North Korean leader took the unprecedented step of unveiling a plan to launch missiles to within a few kilometres of Guam, a major U.S. military outpost in the western Pacific.

Markets shuddered as the war of words escalated. Stocks from Wall Street to Hong Kong tumbled while gold ratcheted higher, as it always does in times of high drama. Was this to be the Cuban missile crisis of our generation?

One worried reader wrote to ask: “On the assumption that Donald Trump is going to start a war, what is a prudent approach to investing in my RRIF? Are there military stocks or ETFs that will benefit from his insanity?”

Well, for starters, Trump is not insane. Yes, he’s unpredictable and there are a lot of things about the man that people dislike. But he’s not certifiable and, fortunately, some cooler heads around him have helped to relieve the Korea rhetoric. Of course, it may all flare up again, but for the moment we seem to have pulled back from the brink.

That said, our reader’s question is still valid. How do you protect your portfolio during periods of escalating tension? And are there potentially profitable investments you should consider at the same time as times get tough?

The initial casualty in times of crisis is typically the stock market. Investors tend to overreact to the events of the day and the better the perceived threat the higher the impact will be. This time around, reaction was fairly mild. During the height of the U.S.-North Korea verbal exchanges, world stock markets retreated but did not go into free fall. That showed that investors were concerned but not panicky. They took some profits, hunkered down for a few days, bought some gold, and watched. At the same time as the bombast toned down, they went back into stocks.

The message is obvious: keep your wits about you, whatever the situation. Don’t pick up the phone and sell all your holdings because some politician blows off steam, even if he is the U.S. president. (And with this president, we should expect a lot additional of this in the next few years.)

Of course, that assumes that your portfolio has been well-constructed to begin with. Our reader says his assets are in a RRIF. That means he is older, so his allocation is probably weighted toward fixed-gain securities, such as bonds and GICs. Stocks should normally make up no additional than half of the assets in a RRIF, and the older you are the lower that % should be. If that’s the case, again our reader should not be worried about his position.

But what about his second question? Are there military stocks or ETFs he could consider buying? The answer is a qualified yes. Socially responsible investors can stop reading presently, but if you have no qualms about putting some money into the armaments industry, you should take a look at the iShares U.S. Aerospace & Defense ETF, which trades on the New York Stock Exchange under the symbol ITA.

No matter what happens with North Korea, the U.S. is planning to invest billions of dollars in upgrading its military in the next few years and the companies in this fund are going to be the beneficiaries.

The portfolio consists of 39 stocks. The major single position is in Boeing, which makes up almost 11 % of the fund. Other large holdings include United Technologies, Lockheed Martin, Raytheon, General Dynamics and Rockwell Collins.

There are other defence ETFs available, but this one is the major, with almost $3.7 billion (U.S.) in assets. It has been the best performer in this group so far in 2017 with a year-to-date gain to Aug. 14 of 20.65 %. The management expense ratio is 0.44 %. The fund makes quarterly distributions, which have totalled $1.57 per unit over the last 12 months for a yield of 0.9 %.

Here’s the caveat: even if investing in weapons of war doesn’t bother you, this ETF is not cheap. Defense stocks have moved up significantly in recent years — the fund was showing a five-year average annual compound rate of return of 22.8 % as of the end of July. So you’re not getting in on the ground floor — investors have by presently made some pretty fat profits on these stocks.

That said, in these uneasy times this is a sector you may want some exposure to. Ask your financial adviser.

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