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Thinking Beyond Stocks and Bonds With Mark Biller

MoneyWise

Christian talk radio with Rob West

April 19, 2022

Almost all portfolios these days rely primarily on a mix of stocks and bonds. But what if you had other safe choices? Investing expert Mark Biller joins us today to talk alternative investment options. Mark Biller is executive editor atSound Mind Investing. Most investors rely heavily on stocks and bonds to balance and diversify portfolios. But some are concerned that stocks and bonds may not be as effective in the future as they have been over the past 20 years. CONCERN ABOUT STOCKS AND BONDS A lot of the concern stems from today’s rich valuations. Bonds follow an iron clad rule bond prices always move in the opposite direction of interest rates. So when interest rates go down, bond prices go up. This is the story of the past 40 years interest rates dropped from the teens to near zero, which pushed bond prices perpetually higher. That meant bond investors got the stability of bonds as well as great returns. But what happens now, from today’s starting point of super low rates, with inflation looking like it could be a persistent problem? We’ve gotten a preview in the first quarter of this year as interest rates have soared higher, which has caused bond prices to fall. In fact, the first quarter of this year was the worst quarter for bonds in decades. Moving to the stock side of the portfolio, unfortunately things don’t look much better. We have historically high valuations following a largely uninterrupted, 12-year bull market. To put it simply, both stocks and bonds look expensive by historical standards. So it’s reasonable to question whether the types of balanced portfolios built on these two building blocks are going to continue to work as well in the years ahead as they have recently. This month’s edition of the Sound Mind Investing newsletter featured an article titled Thinking Beyond Stocks and Bonds. It was actually an excerpt from a book titled The Allocator’s Edge, by investment manager Phil Huber. He describes the problem we were just discussing about stocks and bonds potentially not being enough in the years ahead, and makes the case that a natural evolution has been happening over the past couple decades, where asset classes that used to be considered exotic or fringe have now become mainstream investment options. In the same way, Huber thinks that some of today’s alternative investments will eventually become mainstream too. FROM ALTERNATIVE TO MAINSTREAM Here are a few examples of so-called alternative investments that are now becoming mainstream: Most investors don’t even bat an eye at including things like Foreign Stocks, or real estate in their portfolio. But those were once kind of edgy areas to allocate money to within a portfolio. Another example that SMI has used over the last year and a half has been commodities. And of course there are others, like gold and precious metals, that have long track records as investments, but are pretty outside the box for most modern investors because they’ve been out of favor for a few decades now. Most investors today don’t have access to things like precious metals within their 401k retirement plan at work, and that’s unlikely to change, unless the plan offers what’s referred to as a brokerage window. A brokerage window offers access to a broad range of investment choices beyond the typical short list that’s provided. IRAs are different. They generally don’t impose restrictions on what you can own within them. So for example, if you open an IRA at Schwab or Fidelity, you can usually buy most of the investment options that Schwab or Fidelity offer. Which would mean you’d have access to foreign stocks, real estate funds, commodity funds or ETFs, etc. INVESTING IN REAL ESTATE OR COMMODITIES THROUGH BROKERAGE WINDOW To add something like Real Estate or Commodities to your IRA or through a 401k brokerage window, you will first have to determine how much you want to allocate to these alternative asset classes. NOTE: We are NOT telling you to get rid of all your stocks and bonds! Those will still be the foundation of the portfolio. But some of these other asset classes can help diversify a portfolio beyond stocks and bonds. SMI has specific strategies that tell members how much and when to allocate to each of these classes. But a good starting point for an asset class like real estate, gold, or commodities might be 5% of the portfolio. The current reliance on stocks and bonds in creating portfolios is largely a function of the economic environment we’ve been in the past few decades. Aside from a brief pandemic dip, that market has done nothing but surge for quite some time. Steadily declining interest rates were the driver behind the great bond returns of the past 40 years. It’s no accident that the modern portfolio formula became popular in the 1980s and 90s, after our last bout of significant inflation in the 1970s. If you go back to the 1970s, the last time we had significant inflation, the things that performed the best were many of the same things we’re discussing today real estate, commodities, gold. These are all alternative asset classes that tend to respond well during inflationary periods. Now that we may be dealing with higher inflation for a while, it’s worth dusting off our pre-1980 investing playbook to reacquaint ourselves with what worked the last time inflation was an issue. For more investing guidance, visitSoundMindInvesting. com. On today’s program, Rob also answers listener questions: ●Does it help your credit score to keep a balance on your credit card each month? ●How can you earn the best possible interest on short-term savings?

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