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Interest rates are going up, so bond and stock prices are going down. You can ride it out, but it will be an awfully long rough ride. I recommend moving out of stocks and bonds and holding other assets or hedging your equity and fixed-income holdings.
Dr. Wade Pfau, professor of retirement income, has called bonds "useless” and equities “risky.” What should you own at this perilous time of increasing interest rates and collapsing stock prices?
I discuss two choices: (1) voiding your portfolio of stocks and bonds, and (2) hedging your stocks and bonds.
Portfolios that don’t hold stocks and bonds
If you’re not going to hold stocks and bonds, there’s a long list of investments you could own. The following should protect against inflation: real estate, precious metals, commodities, natural resources, agriculture and, yes, even cryptocurrencies.
Some mix of these assets could make up your risky portfolio instead of stocks.
To control risk, use inflation-protected low-risk assets like short-to-intermediate Treasury Inflation-protected securities (TIPS).
For guidance on the blending, look to the Talmud that advises a third in land, a third in business and a third in reserve. In this case, the third in business would be inflation-protected assets. The initial portfolio would look something like the following:
Risk can be managed by combining these two portfolios, moving into a ”stabilization” portfolio to decrease or increase risk. You can tinker with the sample allocations based on your comfort and understanding.
Hedging
A simple, but very expensive, choice would be to hire some hedge fund managers or a fund-of-fund of hedge funds. But there are plenty of tools available to do your own hedging, including:
- Sell short;
- Buy put options or sell call options;
- Buy ETFs that bet against the stock market like SPXS;
- Buy ETFs that profit from interest rate increases like PFIX;
- Buy buffered ETFs like Innovator’s; or
- Buy volatility, like the VIX.
You control the amount of the hedge. In hedge fund parlance, your “direction” can be long or short, which means you are betting for or against the market. You control the size of your bet by the mix.
If you don’t hold stocks or bonds, and only hold the instruments listed above, you are “short,” which means you are betting against the market – that the market will lose value.
Conclusion
Those who are familiar with my articles know that I see market crashes in stocks and bonds occurring in this decade, combined with serious inflation. Readers ask how I recommend protecting. This is it.
Ron Surz is CEO of Target Date Solutions, Age Sage and co-host of the Baby Boomer Investing Show that you can binge watch on Patreon. He authored the Book Baby Boomer Investing in the Perilous Decade of the 2020s.
Please watch and support our Baby Boomer Investing Show and visit our Baby Boomer Libraries, and our Target Date Fund blog.
Read more articles by Ron Surz
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Dr. Wade Pfau, professor of retirement income, has called bonds "useless” and equities “risky.” What should you own at this perilous time of increasing interest rates and collapsing stock prices?
Risk can be managed by combining these two portfolios, moving into a ”stabilization” portfolio to decrease or increase risk. You can tinker with the sample allocations based on your comfort and understanding.
