Duck! Don’t hit your head on the ceiling!
The 1st quarter of 2013 is in the books, the stock market is flirting with record highs, and the bond market is starting to see higher interest rates. All of which is causing a “conundrum” to investors.
Do you sell your stocks and stock funds at these high levels? After all, the basic strategy of investing is to “sell high, buy low”.
Do you sell your stocks and buy bonds when you get the feeling that interest rates will rise soon? If the interest rates rise, those bonds that you just bought will be of less value in the coming weeks?
Do you sell your bonds, and buy stocks at these lofty prices? Where do you invest? Or do you buy a 1-year CD at 0.15% which will earn just $150 for the year on a deposit of $100,000?
Check out the video of Burt White’s “The Twin Ceiling Conundrum” that we recently posted on our Facebook page, and on our website.
Is a “Bond Bubble” Coming?
Last week’s blog talked about the 10-year treasury bond was earning 1.92%. Well, it’s a week later, and it dropped to 1.85%. Some folks are talking about a “bond bubble” that may be just around the corner, and there may be some traction to that idea. A wave of interest rate hikes will have a dramatic effect on bond prices. If that “bond bubble” bursts, those “so-called” conservative investors will be more than disappointed with the bond performance.
So where do you go?
[pullquote style=”right” quote=”dark”]These are investments that have little to no correlation to the stock market.[/pullquote] We think that investors should consider “alternative investments” as a way of diversifying your portfolio and hedging against downturns in the stock market. These are investments that have little to no correlation to the stock market. This means, these investments have little or nothing to do with the stock market, bond market, and changes in interest rates.
Alternative investments can offer more diversification in a portfolio and it can reduce the standard deviation (risk) of a portfolio.
Generally speaking, “alternative investments” are real estate, managed futures, commodities, precious metals, bank loans, oil & gas, and a few other areas of investments. The price of coffee, wheat, corn and barley goes up and down, but it has no correlation to the stock market. Real estate prices are not linked to the stock market, or bond market for that matter.
By adding alternative investments to a portfolio that consists of stock and bonds you can increase your return too. Take a look at the chart below.
For example, a portfolio invested from 1/1/2011 to 12/31/11 that take consists of Stocks 60% and Bonds 40% produced a return of 5.35% and had a standard deviation of 10.34%. By adding alternative investments to the portfolio, we can reduce the standard deviation (risk) and in this case, increased the return. Changing the portfolio from 60/40 to 40% Stocks, 40% Bonds, and 20% alternatives, the standard deviation dropped to 8.15% and the return increased to 5.96%. Even changing to 30% alternatives reduces the risk even more, and the return over that period increased to 6.23%.
By diversifying with alternative investments, you can reduce the risk, and potentially increase the return.
In today’s investment environment, we need to utilize all of the “tools” available to reduce risk, and
strive for increased returns.
Contact us to discuss alternative investments
To discuss alternative investments, feel free to call us at 814-262.7474 or by using out contact page.