This article is part of our series on options investing, in which The Motley Fool is sharing a number of strategies you can use to get better results from your investment portfolio.
Are you prepared for "riots in the streets, arrests on an unprecedented scale, and martial law?"
But if you've watched Porter Stansberry's "The End of America" video, you may think it’s just around the corner.
Some of the points he makes are valid, though others are clearly hyperbole. This column will help you sort through which is which.
Then, I'll offer some investment ideas -- including an options strategy -- you can use to profit if a pullback comes.
"An even bigger crisis is lurking"
Stansberry's core argument is sound. He points out that the problems that devastated our financial system have not disappeared -- they've simply moved onto the U.S. balance sheet. And as most of us know, this balance sheet wasn't in the best shape to begin with.
But because the U.S. can pay its bills so long as it can continue printing money, and so long as the U.S. dollar remains the world's reserve currency, all is fine and dandy.
A crisis could come when the rest of the world refuses to accept payments in U.S. dollars, or refuses to pay for things like commodities with U.S. dollars. Stansberry asserts that this is already afoot -- but it's not quite as dire as he would like you to believe.
Yes, there’s talk of a "global reserve currency" as big U.S. debtholders like China are diversifying away from Treasury bonds. But it's hard to make the case that the U.S. dollar will disappear as the world's reserve currency within the next few months to a year, as Stansberry predicts.
Even so, you can profit
Though it may not be as dramatic as Stansberry envisions, another market downturn could still arrive -- meaning you should begin to think of how to protect your portfolio and profit from a significant pullback.
Stansberry doesn't reveal all his suggestions -- he's trying to sell subscriptions, after all -- I was able to reverse-engineer a few of his recommendations.
One of his top recommendations is to purchase a working farm. Although the dreamer in me agrees (it's my long-term goal to retire as a hobby farmer), and to a certain degree it makes sense, I think this investment is outside the realm of most investors.
He also recommends investors buy gold and silver. It's clear he's partial to gold coins and physical precious metals, as opposed to the SPDR Gold Trust (NYSE: GLD ) and the iShares Silver Trust (NYSE: SLV ) .
But as we've seen, gold and silver prices are extremely volatile. And physical assets are hard to sell -- meaning that even with their minimal protection, it can become impossible to make money if you can't find a buyer or if you have to pay a commodity broker a hefty commission.
One alternative is to purchase financially sound dividend-paying large caps. Many companies actually increased dividend payouts during the last market downturn. I'm reasonably confident that some could do the same again.
Here are five companies I would look into that either maintained or raised their dividends through the last downturn.
Current Dividend Yield
5-Year Compounded Annual Growth Rate of Dividends
|Yum! Brands (NYSE: YUM )||$23.9 billion||2.2%||32.2%|
|Texas Instruments (NYSE: TXN )||$30.1 billion||2.5%||34.7%|
|UnitedHealth Group (NYSE: UNH )||$49.0 billion||1.4%||78.1%|
|McDonald's (NYSE: MCD )||$87.7 billion||3.2%||28.9%|
|IBM (NYSE: IBM )||$192.7 billion||1.7%||24.6%|
Data from Capital IQ, a division of Standard & Poor's.
An options strategy you can try
The final strategy Stansberry recommends is an options strategy. Based on various quotes he provides, I'm pretty sure he's advocating selling put options.
By writing put options, you get paid a premium for agreeing to buy the underlying stock if it falls below a certain level by a given date. If the put is not trading below that level by the exercise date, then you pocket the money.
He touts this as an easy way to pocket 100% gains over and over again without ever touching a stock -- which is technically possible.
That being said, there are risks. You can probably guess where the problem lies -- if the stock falls drastically below the agreed-upon price, you are still committed to buying the stock at the agreed-upon price. Which means that it could take months, if not years, to recover if the stock tanked.
This doesn't mean you should dismiss writing puts altogether. But it does mean that you should be judicious about which companies' stocks you write puts on. Companies like the dividend-payers I mentioned above could make good put-writing candidates.
It should also remind you that it's risky to merely speculate with these trades. Make sure you write put options only on companies you'd actually be comfortable owning at the right price.
Stay tuned throughout our options investing series and get the strategies you need to earn more from your investments. Start with the series intro for links to the entire series.
This article has been updated since its original publication on June 9, 2011.