When Stocks and Bonds Won’t Do

• Interest rates are going up, so bond and stock prices are going down.
• You can ride it out, but it could be an awfully long rough ride.
• The other option is to move out of stocks and bonds and either (1) hold other assets or (2) hedge your stocks and bonds

Dr. Wade Pfau, Professor of Retirement Income, Calls Bonds Useless and Equities Risky. So, 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 hold. 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, you’ll want to use inflation-protected low-risk assets like short-to-intermediate TIPS (Treasury Inflation-Protected Securities).

For guidance on the blending, you could look to the Talmud which 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 more or less into the 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
• Buy volatility, like the VIX 

The list goes on. 

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 usually ask how I recommend protecting. Here it is.