An Investor's Best Defense in Treacherous Times

April 7, 2025

| Sean Michael Cummings

We've been living through a record-setting market – but not the good kind of records...

Stocks just suffered their worst first quarter of the year since 2022. March was also the worst month for stocks since December 2022.

Last week, we saw the market's worst week of losses in almost five years, going back to the early months of COVID-19.

And according to Bloomberg, the stock market just experienced its worst 10 weeks to start any presidency since 2001.

But unlike in 2001, the recent crash isn't due to a bubble bursting. It's the result of a deliberate economic shock...

After markets closed on Wednesday, President Donald Trump revealed his much-discussed tariff package.

The plan included a flat tariff of 10% on all foreign imports, plus higher duties for America's biggest trade partners. The tariff package shocked Wall Street... and provoked Thursday's hasty sell-off.

So far, this administration has been painful for stock investors. And the new tariffs look certain to ring in more volatility from here.

But there's a simple way to protect your portfolio from future shocks. You just need to be strategic about asset allocation.

Let me explain...

The Downside to Passive Index Investing

One of the most common market approaches is "passive index investing"...

If you're a passive index investor, you're paying a percentage of your wages into a broad market index like the S&P 500. This approach gives investors easy exposure to the whole scope of American industry. But this strategy has a catch...

Stock indexes are weighted by market capitalization. That means the bigger a company is, the more space it takes up in its index. And this weighting can burn passive investors worse than they realize.

For example, the top seven tech companies in the S&P 500 make up about 28% of the index today. That means passive investors are putting a lot of eggs in the Big Tech basket.

But supply chains for Big Tech are complex... And just about all of them run through China. That leaves stocks like the so-called "Magnificent Seven" extra exposed to the new tariffs. That's part of why the S&P 500 fell so much last week.

Investors who pour their money into a market-cap-weighted index fund risk taking greater losses whenever Big Tech names hit a stumbling block.

A top-heavy market can be dangerous. But investors can protect themselves by simply buying other assets...

Since November, I've highlighted the importance of diversification in a high-tariff regime. I've recommended a blend of stocks, bonds, and precious metals like gold to prepare for the new "Trump Trade."

Now that there's some data in the books, we can look at how diversification has performed since Trump took office.

We'll use the iShares 20+ Year Treasury Bond Fund (TLT) as a stand-in for bonds. This fund tracks the performance of long-dated U.S. Treasurys.

And we'll use SPDR Gold Shares (GLD) for gold. This fund holds gold bullion in trust and allows investors to get easy exposure to the metal.

Below is a chart of how stocks, bonds, and gold have fared since Inauguration Day on January 20. Take a look...

Since Trump took office, stocks have tanked by about 16%. But in the same period, bonds and gold have soared – rising 6% and 11%, respectively.

In other words, a blended approach was a strong defense compared with an all-stock strategy.

You can see just how much of a difference asset allocation makes in a few different portfolio mixes below...

Again, an all-stock portfolio has fallen 16% since Inauguration Day. But by placing a third of that allocation into a 50-50 blend of bonds and gold, the drawdown shrinks to just 8%.

Allocating half of the portfolio to the bond-gold blend would have resulted in a 4% drawdown since Inauguration Day.

And a portfolio split evenly between all three assets would be about flat.

Passive investors have been eating losses all year. But you can break that cycle now, simply by adding variety to your investments.

If you haven't yet, I urge you once again to diversify your portfolio with gold, bonds, and even crypto today.

Your peace of mind will thank you for it.

Good investing,

Sean Michael Cummings

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An Investor's Best Defense in Treacherous Times

The Downside to Passive Index Investing

Further Reading