Momentum-based stock picking has been the strategy of choice among investors for some time, and there’s no denying that strategy has paid off handsomely.
For instance, by focusing on the most actively traded large-cap or mega-cap stocks with heavy institutional ownership and well-defined uptrends, it wasn’t difficult to match, or beat, the performance of the benchmark S&P 500 Index last year.
However, with the recent acceleration of the tariff war between the U.S. and countries like Canada, Mexico and China, turbulence has lately been seen across the broad market, forcing many participants to rethink this strategy. Fortunately, a reliable—and potentially profitable—alternative exists for environments like this when defensiveness is a paramount concern: An all-weather portfolio.
Not only is this alternative strategy useful in volatile markets (including bear markets), but it can also be structured as a permanent feature of your portfolio that can perform well in virtually any market environment.
Get My Free Report Now
Get My Free Report Now
Get My Free Report Now
Get My Free Report Now
One of the advantages of being the chief analyst of the Cabot Turnaround Letter is that it keeps me from the temptation that seems to plague multitudes of investors these days, namely the incessant focus on short-term profits. Instead, I’m constantly on the lookout for the types of stocks that tend to perform well over a long-term horizon, regardless of market climate.
Turnaround stocks tend to perform exceptionally well after a bear market, when investors are sifting through the rubble of a beaten-down market environment on the lookout for bargains. But a turnaround investing approach is equally serviceable during bull markets and, more importantly, during the transition stage from a bull to a bear.
The key here is to look for ignored or out-of-favor stocks that are underperforming on both a three-year and a five-year basis. Importantly, you want to find a stock for which the prospects of a reversal of fortune for the company—or for the industry in which the company is engaged—are fundamentally strong.
Such beaten-down stocks typically outperform during the transition from bull to bear and very often hold their value during downtrends in the market since investors have already dumped them and have moved on to other stocks. In terms of market category, the stocks you’re looking for should ideally be within a sector that can perform well in any type of market, which includes the energy and healthcare sectors, and for which there exists a long-term demand tailwind.
Stocks falling into this category at the present time include the energy sector, which happens to be this year’s second-best performing sector in the broad S&P 500, even managing to outperform the defensive-oriented utilities sector by around 3% year to date.
According to First Trust’s Robert Carey, of the Cash Flow and Carey newsletter, “Electricity demand is surging as resource-intensive workloads such as training AI models, electric vehicle charging, and electric appliances are introduced into more U.S. homes.”
Normally, oil and natural gas stocks would be vulnerable to the headwinds of a turbulent stock market in the face of recent tariff concerns. But as Carey points out, the wider energy sector is apparently undergoing a foundational shift that could surprise traditional near-term expectations.
As he put it, the emergence of the U.S. as a global leader in crude oil production, plus the increase in electricity demanded by AI, electric cars and electric household appliances, could keep energy stocks elevated despite tariff-related headwinds.
I’m seeing a growing number of potential turnarounds in the energy group, so I’d recommend starting here when structuring the stock portion of an all-weather portfolio.
Secondly, and most importantly, an all-weather portfolio should have a core gold-related component. The precious yellow metal itself is something of an all-weather investment that holds its value and performs well in both deflationary and inflationary environments over the long term. Having some physical gold and/or gold-backed ETFs, plus a couple of blue-chip gold mining stocks, is a good idea for an all-seasons portfolio.
If you want to devote a smaller percentage of your portfolio to smaller, more speculative mining shares, I would again recommend focusing on stocks that have experienced big declines, but which have either initiated strategic initiatives to turn the company around or else have strong fundamental prospects for reversing.
Last month in the Cabot Turnaround Letter, I profiled a number of such miners that fall into this category, including Barrick Gold (GOLD) and DRDGOLD (DRD), but there are many other worthy miners that fall under this same category.
Concerning gold’s inflation-protecting attributes, author Harry Browne in Fail-Safe Investing extolled gold as “the best inflation hedge because it’s much more powerful and reliable than any other investment that might react favorably to inflation. Whatever the inflation rate (once it reached 6% or so), gold will respond much more powerfully than any other investment.”
Browne recommended that roughly 25% of one’s portfolio should be allocated to gold, but I would recommend spreading this allocation among physical bullion as well as top-quality gold mining shares.
The remaining portion of your portfolio (the percentage of which entirely depends on your risk tolerance) can be committed to a mix of long-term and short-term U.S. government debt. As long as the federal government retains the ability to print money and tax, Treasury bonds will always remain a safe option for surviving all types of economic climates.
By focusing on out-of-favor stocks with strong turnaround potential, gold-related assets and Treasuries, an investor can structure a portfolio that will both survive and prosper in virtually any financial market. If you need any additional ideas on how to navigate even the most difficult financial terrains, please consider subscribing to the Turnaround Letter.
