Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24
Stock & Crypto Markets Going into December 2024 - 2nd Dec 24
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock”

Portfolio / Investing 2020 Mar 21, 2020 - 01:57 PM GMT

By: Jared_Dillian

Portfolio

For months—years—I’ve been extolling the virtues of portfolios that are primarily comprised of bonds. Especially in retirement.

Bonds provide necessary diversification. They may end up reducing returns, but you are more than compensated by the reduction in risk.

A few months ago, people were giving me a lot of grief about this. I heard all about how irresponsible it was to promote bonds in a low interest rate environment. Then interest rates went even lower, as stocks went down a lot.


So people with a bond-heavy portfolio would have been… happy. Or at least, they would have slept well at night.

Never mind the fact that because of convexity effects, when interest rates are low and go even lower, bond prices go up a lot. When the Fed cut rates 50 basis points in early March, at one point the long bond was up more than five points in a day.

And people say that bonds are boring!

Anyway, the point of holding bonds is for the diversification benefits. But when interest rates are very low (close to zero), some of those benefits start to disappear.

This makes things very hard. If stocks are volatile, and bonds are no help, where do you put your money to mitigate volatility? There aren’t many options.

Your Options

Here are your options:

  1. Commodities (especially gold)
  2. Real estate (either physical real estate or REITs)
  3. Cash
  4. Misc., like collectibles and art

Generally, art and collectibles do a pretty poor job of diversifying a portfolio. They’re cyclical and tend to move with stocks.

I always like cash, and everyone should have 10–20% cash in their portfolio at all times. The good thing about cash now is that, with interest rates at such low levels—perhaps even negative—the opportunity cost of holding cash is low.

It’s kind of dumb to hold cash when interest rates are 8%. Makes more sense when rates are at 1%.

The big diversifiers are really commodities and real estate. Commodities are a tough sell right now, though. They have a negative cost of carry, and they’ve been going down for a long time.

We’re currently experiencing a deflationary shock with coronavirus, but my suspicion is that the deflation is a head fake.

Within commodities, though, gold has a special role. Its whole purpose is to provide diversification, because it’s the anti-stock and anti-bond. It’s the alternative to traditional finance. And the correlation is typically zero, or negative (or it used to be).

I think that it makes sense to move away from bonds as a diversifier and toward gold.

That’s hard for people to swallow. I proposed this to my mom who thinks gold is risky. It is certainly “riskier” than the bonds she is holding, if you define risk as volatility. But again, you add something with low correlation to stocks and bonds to the portfolio, and it is going to improve the risk characteristics.

The same is true for real estate, although less so. The nice thing about real estate is that it also provides income, which gold doesn’t. Although again—in a low rate environment, the opportunity cost of holding gold is practically nonexistent.

Real estate should perform well in an inflationary environment, and it should also provide decent diversification benefits.

The Portfolio

People have very practical concerns about how to 1) save for retirement and 2) protect against inflation in a low interest rate environment.

To do that, you want a portfolio with less stocks, less bonds, some cash, some gold, and some real estate. What does that look like?

The 20/20/20/20/20 portfolio.

  • 20% stocks
  • 20% bonds
  • 20% cash
  • 20% gold
  • 20% real estate

This is the benchmark we should be using for the next 10 years and beyond.

Get Contrarian Investment Ideas from a Wall Street Veteran

Jared Dillian writes The 10th Mana free weekly newsletter for contrarian investorsEvery Thursday, he delivers a torpedo of incisive commentary that crushes consensus thinking and exposes the true workings of “Mr. Market.”  Subscribe now!

By Jared Dillian

© 2020 Copyright Jared Dillian - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in