We've managed to avoid the great Mayan prediction of the end of the world in 2012, along with countless doomsday prognostications before it. But while we shrug off the continued calls that some people still predict about the end of the world, it's undeniable there are good reasons investors should have a "doomsday portfolio" to protect them from catastrophic losses.

I'm not talking about the end of times, though. In the event of runaway asteroids or "the second coming," saving for your golden years will be the least of your worries.

But I'm also not talking about simply a global malaise in economic growth or the gradual loss of purchasing power in the U.S. dollar, either.
I'm talking about a quick collapse of order -- a collapse of faith in our institutions and a resulting widespread loss in financial assets.
And if you think this could never happen, then think again.
Hurricane Katrina destroyed more than $60 billion in economic value and led to massive looting and a surge in energy prices. The "once-in-a-century" disaster was followed just seven years later by Hurricane Sandy, which caused damage that may cost up to $50 billion.

Officials in Japan have found radioactive material in produce up to 200 miles from the Fukushima nuclear disaster.

The point is, large-scale disasters, man-made or natural, seem to be getting stronger and more frequent.

Combine a few disasters with the collapse of a government or financial systems abroad, and you've got the makings for hysteria and catastrophic investment losses here at home. While stocks and other assets would eventually rebound, wouldn't it be nice to know that you are protected on the downside?
Peace of mind and reasonable returns
Devoting a portion of your portfolio to "disaster insurance" types of assets is not as difficult as it may seem. And it doesn't have to come at the expense of returns, either. Three key points can help you build a doomsday portfolio that will provide returns as well as peace of mind...
  • Own hard assets that can be used to store value in the event currencies cease to carry popular support
  • Own shares of stable, defensive companies with production and sales across multiple regions or countries to diversify geo-political risk
  • Own assets that provide enough current income to provide a reasonable return on your money in the event the sun comes out tomorrow.
With these three key traits in mind, here's a list of ideas and the stocks that should help any portfolio survive a collapse during bad times, but also perform well during the good times.
1. Gold
The ultimate storage of value when the government is no longer able to back its fiat money and investors get nervous about the future... is gold. The precious metal just saw its 12th consecutive year of gains, jumping almost six-fold from the beginning of its run in 2000.
Gold can pay off on two doomsday scenarios: a jump in inflation or a spike in market fear. An investment in physical gold through the SPDR Gold Shares (NYSE: GLD) has easily beaten most other assets during the past decade, but the fund pays no dividend. While I think the shares could edge higher and would surge in a crisis, I also want something that is going to pay me to wait.
That\'s why I also like Barrick Gold (NYSE: ABX). It\'s the world\'s largest gold miner, with 26 mines in operation across five continents. This diversity in production insulates the company from unrest in any one part of the world. The stock pays a dividend yield of almost 2.5% and is not expensive at just 10 times trailing earnings.

[Further reading: "Revealed: An Inside Look at Ron Paul\'s Portfolio"]
2. Oil-exploration and production
Even with alternative forms of energy coming into their own, the world still runs on oil. The United States still meets 40% of its energy needs through petroleum, and that percentage is much higher in most of the other countries. If confidence were to be lost in global governments and currencies, then oil would be needed as a store of value and for use in production.
Chevron Corp. (NYSE: CVX), the nation\'s second largest oil company, is the first to come to mind. The company has assets and sales all over the world and a strong 3% dividend yield.
I wouldn\'t put all my eggs in one basket though, so I also like the exchange-traded fund (ETF) Energy Select SPDR (NYSE: XLE) for its 1.7% yield and diversification across 45 energy companies. The ETF carries an extremely low expense ratio of 0.18% and trades at a relatively cheap 12 times trailing earnings of the companies held.
3. Water
You can live for weeks without food and shelter, but water becomes a necessity within just a few days. The Journal of Environmental Science & Technology estimates that 1 in 3 counties in the United States could face a "high" or "extreme" risk of water shortages due to climate change by the middle of the 21st century. Combine this trend of scarcity with an unforeseen catastrophe that wipes out some supply, and you\'ve got hysteria on your hands.

American States Water (NYSE: AWR)
provides water services in 10 California counties, including drought-prone Los Angeles. The company pays a 2.8% yield and has a 58-year record of increasing dividends. The price-to-earnings (P/E) ratio of 19 might seem high, but it is still below the industry average of 21.
Aqua America Inc. (NYSE: WTR) could diversify your water exposure through 12 other states in the U.S. and across other water and wastewater service providers. The company pays a sustainable 2.6% yield and has been successful in pushing through large rate increases to pay for infrastructure projects and increase annual revenue.
4. Tobacco
If you think tobacco is not a necessity, just ask anyone who has tried to quit smoking. In the event of an environmental or economic catastrophe, people may cut back on most other products, but they will always buy their cigarettes.

Lorillard (NYSE: LO)
is the third-largest cigarette producer in the U.S. and has been increasing its market share steadily from 11.8% in 2009 to 14.1% in 2011. The stock pays a huge 5.2% dividend yield and trades at just 14 times trailing earnings, well under the industry average of 16.8.

Philip Morris International (NYSE: PM) diversifies exposure to the industry with its strong international presence and brands like Marlboro and Virginia Slims. The shares are relatively expensive at 18 times trailing earnings, but management has plans to expand into the Chinese market, which could significantly increase earnings.

[See also: "The Most Hated Company on Earth is Bringing Investors Big Profits"]

The "Doomsday" Portfolio
Risks to Consider: The risk to buying any kind of insurance is that you never need to use it. That is why I have tried to selectinvestments that would perform well even if the worst-case scenario fails to emerge.

Action to Take --> Just as you would not spend your entire income protecting your house with insurance, you would not devote your entire nest egg to a "doomsday portfolio." Allocating a small chunk, however -- maybe 5-10% -- of your equity portfolio to these kinds of investments is definitely a smart move.
.
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  3. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  4. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  5. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  6. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Fractal Markets Hypothesis (FMH)

    An alternative investment theory to Efficient Market Hypothesis ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!