Commodities, real estate, and certain other investments that once had little appeal to the average investor — and were largely out of reach anyway — have become more mainstream and accessible.
And, as SMI executive editor Mark Biller explained yesterday on Moody Radio’s MoneyWise Live, such investments are increasingly attractive as portfolio diversifiers.
To listen, click the play button below. Scroll down for the transcript.
MoneyWise Live, with host Rob West, airs daily at 4:00 p.m. ET/3:00 CT.
For more radio appearances by members of the SMI team, visit our Resources page.
Transcript
Rob West:
Almost all portfolios these days rely primarily on a mix of stocks and bonds, but what if you had other safe choices? Mark Biller joins us today to talk about that. Then it’s on to your questions at 800-525-7000. Call with your investing questions. This is MoneyWise Live — biblical wisdom for your financial decisions. (music ends)
Well, our friend Mark Biller is executive editor at Sound Mind Investing. And if there’s a new way to diversify a portfolio, he and his team are on it! Mark, welcome back to the program.
Mark Biller:
Hey Rob. Glad to be back with you.
Rob West:
Well, Mark, there’s no question that most investors today are reliant on — particularly — stocks and bonds to balance and, of course, diversify portfolios. But there’s growing concern that stocks and bonds may not be as effective in the future as they’ve been over the past — let’s say — 20 years. So help us understand, Mark, what those concerns are.
Mark Biller:
Yeah, absolutely Rob. You know, it sounds crazy because the stock/bond portfolio — you know, the 60/40 balanced portfolios — have been so great for so many years now. The last 30 or 40 years, they’ve just been tremendous. But a lot of the concern today really stems from the starting point of today’s rich valuations for both stocks and bonds.
So starting with the bond side. You know, bonds follow an iron-clad rule — we often refer to it as "Bond Investing 101" here at SMI — and that is simply that bond prices always move in the opposite direction of interest rates. So when interest rates go down, as they have for most of the last 40 years, bond prices are going to go up in response to that. And so, like I said, that’s really the story of the last four decades, where starting in the early ’80s, when interest rates were in the teens, they steadily dropped to near zero here in the last year or two.
And so that has given a tremendous tailwind to bond prices, pushing those perpetually higher. And that meant that bond investors really had the best of both worlds. They got the stability of bonds and they got these great returns.
But now from today’s starting point, we have to ask ourselves, "Well, what happens next when we’re starting now with these super-low rates, and inflation looking like it could be a problem that hangs around for a while?"
So we’ve kind of gotten a preview of that here in the first part of this year as interest rates have really just rocketed higher, and that’s caused bond prices to fall. And we’ve had one of the worst first quarters for bonds in many years. It’s been tough to be a bond investor.
Now, when we flip over to the stock side of the portfolio, things aren’t tremendously better. We’ve got historically high valuations following this largely uninterrupted 12-year bull market that we’ve had. So when you put those two together, Rob, both stocks and bonds by historical standards look pretty expensive. So it’s reasonable to question whether that 60/40 balanced portfolio that’s built on these two building blocks, if that’s going to continue to work as well going forward as it has in the recent past.
Rob West:
Yeah. And that’s a great summary of the concerns we’ll come back and touch on each of those stocks and bonds a little bit more. But let’s move to this month’s edition of the SMI newsletter, where you featured an article titled Thinking Beyond Stocks and Bonds. Set that up, and then we’ll unpack it after the break.
Mark Biller:
Yeah, sure. So this article is actually an excerpt from a great book titled The Allocator’s Edge written by an investment manager named Phil Huber. And he describes this problem we’ve just been discussing — about stocks and bonds potentially not being enough in the years ahead.
He also talks about the natural evolution that’s been happening, where asset classes that used to be considered kind of exotic or fringe are now becoming more mainstream. And he thinks there are some others that will become more mainstream in the years ahead.
Rob West:
More to come on Moneywise Live right around the corner. Stick around.
Rob West:
Mark, I’d love for you to build on what you shared just before the break, and perhaps give us some examples of these alternative investments that you say are now becoming more mainstream.
Mark Biller:
Yeah, absolutely. Rob. So, you know, it’s kind of funny because today most investors really wouldn’t even bat an eye at including asset classes like foreign stocks or maybe real estate to their portfolio. But, you know, those were the asset classes that were once kind of the edgy areas to allocate money to within a portfolio. And over the years, they’ve kind of become normal and common.
Another example that SMI’s used over the last year and a half has been commodities. That’s a class that most investors have not allocated to over the last several years, at least maybe even a couple of decades. And of course, there are some others — things like gold, precious metals that have a long track record as investments, but they’re pretty outside-the-box for most of today’s investors because they’ve been out of favor now for a while. And in some of these cases have only recently had vehicles created that make them easy to invest in.
And that kind of raises an interesting point, Rob — something like gold that has been a great investment, sought after for 4,000 years, and yet most investors today probably don’t have access to it within their 401(k) retirement plan at work.
Rob West:
Yeah. And that’s an important point. How likely is it that folks are going to have access to these different investment options in those retirement plans?
Mark Biller:
Yeah, unfortunately, the odds, aren’t great when you’re talking about most 401(k)s, 403(b)s, those types of company retirement plans — with one exception. And that is if the plan offers what’s called a "brokerage window." It may have a slightly different term, but that’s a common term for this. A brokerage window simply offers access to a broad range of investment choices beyond that typical short list that most plans provide.
Now of course, within an IRA, things are different. IRAs generally don’t impose any investment restrictions on what you can own within the account. So, for example, if you open your IRA with Schwab or Fidelity, you can usually buy just about anything that Schwab or Fidelity offers. And that means you would have access to foreign stocks, gold ETFs, real estate funds, commodity funds, and on and on.
Rob West:
So if someone wanted to add something like real estate or commodities to their IRA or through their 401(k) brokerage window, how would you recommend they go about that?
Mark Biller:
I think the first thing to do is really determine how much of your portfolio do you want to allocate to these alternative classes? You know, I certainly don’t want anybody listening today to hear this and think that I’m saying you, you get rid of all your stocks and bonds. That’s definitely not the message today. Stocks and bonds are still going to be the foundation of the portfolio. We’re just suggesting some of these other asset classes can help diversify the portfolio beyond those core building blocks.
So, at SMI, we’ve got specific strategies that tell members how much and when to allocate to each of these. But for somebody doing this on their own, I think a good starting point for an asset class like real estate or gold or commodities might be to allocate, say, around 5% of the portfolio to an asset class like that. That’s enough to make a difference but not so much that if it doesn’t do well that it’s gonna upset the balance of the whole portfolio.
And we’ve got articles at Sound Mind Investing on all three of those and some other asset classes. And those articles typically talk about specific ETFs or mutual funds that you can buy to get exposure to those asset classes. Once you have a few of those ticker symbols of those ETFs or mutual funds, then it becomes pretty easy to add those to your portfolio.
Rob West:
Mark, switching gears a bit, it seems like a lot of the current reliance on stocks and bonds in creating portfolios is a function of the economic environment we’ve been in the past few decades. Would you say that overall economic environment is changing, and how does that play into all of this?
Mark Biller:
Yeah, I think that’s a really big part of it. You know, the steadily declining interest rates that we were talking about earlier, those were the driver behind these great bond returns of the last few decades. And that really only happened because we were in this economic environment where inflation was steadily declining. So it’s not an accident that this modern portfolio construction — the 60/40 balanced portfolio — became really popular in the ’80s and ’90s, which was after our last bout of really significant inflation in the 1970s.
Now, if we go back to the 1970s, when we had that last bout of significant inflation, the things that really performed the best during that decade were a lot of the same things we’re talking about today: real estate, commodities, gold — these alternative asset classes tend to respond really well during inflationary periods. So, the last couple years, Rob, we’ve had this, this kind of dual wake-up call with COVID and now we’ve got this war in Ukraine. And so the idea that globalization — which has been the dominant trend of the last few decades — that we can rely on these far flung supply chains and just-in-time inventory and all of this, we’re kind of getting the idea that maybe that’s not so wise after all.
And so all of this is simply to say that we may be looking at more inflationary trends persisting even after COVID is in the rear-view mirror and after, hopefully, this war winds down. And if that’s the case, if we have this more inflationary environment, then it’s certainly worth dusting off that pre-1980 investing playbook to reacquaint ourselves with some of the things that worked really well the last time we had inflation.
Rob West:
Thanks for joining us today on MoneyWise Live. Our friend, Mark Biller with us today — executive editor at Sound Mind Investing. You can learn more at soundmind,investing.org.
We’re talking about an article in their recent edition of the Sound Mind Investing newsletter entitled Thinking Beyond Stocks and Bonds. And Mark’s been talking about some of those alternative investments like real estate, like commodities saying that perhaps in this period of high inflation, with some interesting economic factors going on, not to mention the high valuations of stocks and rising interest rates, perhaps it’s time to dust off what he called the "1980s playbook," which also included high inflation, about how we should think about our investments.
Mark, as we look at that in light of these portfolios that many especially retirees have that include a portion, perhaps a large portion, in bonds, how should they think about that moving forward, given that that was so core to their strategy to this point?
Mark Biller:
It is a tricky question, Rob, and you know, I think that probably the most important point there is that just like with stocks — there are variations between types of stocks, the same is true in the bond market. There are various types of bonds. And one of the key distinctions is how long is the term or the duration of the bonds that you hold?
The reason that that’s so important is that rule that we talked about before, where when bond yields go up, when interest rates go up, bond prices go down. Well, the degree of how much the prices are going to change is dependent on how long-term the bonds are. So long-term bonds are going to move a lot when interest rates go up or down. So interest rates go up, a long-term bond with a long duration is really gonna take a big hit in its price. On the other end of the spectrum, short-term bonds are going to move relatively little, even when interest rise. So one way that retirees can protect themselves is to shorten the duration of the bonds that they hold in their portfolio.
Now, the trade-off there, of course, is that shorter-term bonds typically have lower interest rates. They pay less interest that longer-term bonds do. So you’re having to play this trade-off of a lower yield, a lower interest rate, versus less risk of having rising rates really hurt the principle value of your bonds.
Another way you can get around that, of course, is to own individual bonds and hold them through maturity. If you do that, then you don’t have to worry about interest rates going up or down because you’re going to get paid exactly what the terms of that bond are all the way through. And as long as that company stays in business and is able to pay off the bond at the end, then you’re going to get your principal back at the end of that term. So that’s another option as well, though that can be obviously more difficult than just buying a Vanguard bond index fund, something like that.
So those are a couple of ways that you can go about that. And, of course, with interest rates rising so much recently you can look in your bond portfolio and if you own different types of bonds, you’ll see that disparity with longer-term bonds being down quite a bit more than your short-term bonds.
Rob West:
That’s really helpful. Questions for Mark Biller today while he’s here on the program: 800-525-7000 — market or economic-related questions. We’d love to hear from you.
Let’s head to the phones right now, Judy, thanks for calling in today. How can we help you?
Caller:
Well, I don’t have big capital, when I listen to your program and I hear what all the things other people have had. As a retired missionary, spending a lot of my own money to visit the churches, coming home, back and forth, and moving back to this country, I don’t have a lot in savings — and yet it just breaks my heart to go to the bank or the credit union and give them any amount of money and get back less than 1%.
And so I kept hearing about gold IRAs and gold — and I don’t know which way to go. I mean, I did open a Schwab account, but it’s just too much following the money trail. That’s not my thing. My thing is music and teaching and psychology. And I’m not interested in following bonds and stocks. But I thought something that would be relatively fluid that I could use as a saving type of thing that would be safe that I could do in and out. But that may not exist.
Rob West:
Sure. Well, thanks for that description. And Judy, delighted to hear how you’ve been in service to the Lord as a missionary and now trying to be a faithful steward of what he has entrusted to you. And there’s folks that listen to this program that have much and others that have a little, and we all just want to be found faithful with what we have.
Would you mind just sharing — are you living off of any portion of this amount that you’re looking to invest? Are you trying to draw an income off of it currently? Or is it money that’s just going to grow for the future, if you need it down the road?
Caller:
Right. It would be in addition to.
Rob West:
Okay. And just approximately how much are we talking if you don’t mind me asking?
Caller:
Oh, maybe a hundred two a month.
Rob West:
Okay. All right. Mark, what are your thoughts just given what Judy’s describing here?
Mark Biller:
You know, I think Judy, it sounds like the, the primary thing that you’re after is really safety of principle with this money — not wanting to take much of any risk. And so the types of things that we’ve been talking about these very short-term bonds those are probably a pretty good option.
Now, it is true that even those even short-term bonds can lose a little bit of money, so it’s not the same thing as a bank savings account or a CD in the bank. And for any listeners who really are just not willing to take any risk with the money that they’re wanting to invest or put away in savings, you really have to think about that right now: Is it worth taking the little bit of risk to be in short-term bonds? Even though those have traditionally been thought of as quite safe, they can go down a little bit. And so a CD at the bank or a bank savings account could be the best option in those cases.
Rob West:
Yeah. And I think I heard you say "in and out," meaning you want access to this money more readily. And I think for that reason, you probably — as much as we don’t like the yields right now — are gonna be limited to these bank products. I’d look at high yield savings accounts that are approaching 1%. You might even find some just beyond 1%. And the good news is over the balance of the year, they’ll be higher. Check out Ally Bank or AdelFi. You can also look at Marcus — marcus.com.
We’ll be back with more with Mark Biller just around the corner. This is MoneyWise Live. Give us a call. We’ll look forward to hearing from you.
Rob West:
All right, back to the phones we go with Mark Biller along on the broadcast today. To Traverse City, Michigan. Tom, thanks for calling. Go right ahead.
Caller:
Oh my, yes. I wanted to just comment to you guys what I’ve been doing recently for safe cash instead of bank CDs — because bank CDs, pay so poor. I’ve been purchasing — kind of setting up a ladder of 3-month, 6-month, 9-month Treasuries. And I’ve my understanding is Treasuries are extremely safe, and I’ve just been laddering them. Like a 9-month right now — I just bought one today — pays 1.65% interest. So I want to throw that idea out and hear your comments on that.
Rob West:
Yeah. Mark, what do you think about this strategy?
Mark Biller:
Yeah, I like it, Tom, if you’re willing to do the work and that’s really the, the big catch, not everybody’s gonna be willing to buy those individual bonds. But if that’s not a concern, then I think that that’s a great idea. Like we were talking about a little earlier in the program, if you’re buying individual bonds or bills, Treasuries — like Tom is — then you don’t have to worry about that. Rising interest rates knocking down the principal of your bonds because you are going to get paid the exact terms of the specific bond that you’re buying. So that whole dynamic that we were talking about really only applies when you’re buying the types of bond funds that you typically would have in your 401(k).
So, Tom, I love the idea of a ladder. You know, it’s a great way to take advantage of rising interest rates because as you keep adding to your ladder, presumably those rates are getting better and better with each bond that add to the end of the ladder.
One thing here that I think is worth pointing out is that these rising interest rates, while they’re tough on people who already have money in bond funds today, the silver lining of those higher interest rates is that it’s really good news for savers because savers are going to eventually be able to take advantage of much better interest rates on things like bank CDs, short-term Treasury bills, like Tom’s buying, that kind of thing. So I like the idea, too. You have any thoughts, Rob?
Rob West:
Well, I would concur with that — again, if you will willing to do the work. And perhaps mix I bonds in with that as well — the inflation protected bonds, which are, based on the latest number, gonna be paying nearly 10%. You do have to hold it for at least a year, but an incredible interest rate with the full faith and credit of the United States government backing it. You can only put in $10,000 per person, an additional $5,000 from a tax refund, for a total of $15,000. But still something worth looking at as a part of an overall strategy. So Tom, thanks for weighing in today.
Mark, before we wrap up this segment and let you go, you mentioned alternative investments, one of those being real estate. Obviously not everybody can buy a direct ownership in real estate to turn it into a rental or something. So talk about REITs — real estate investment trusts — or any other ideas you have on how they can make an allocation in a portfolio.
Mark Biller:
Yeah, REITs are a great way to get real estate exposure within a portfolio. A lot of REITs are actually focused on more the commercial side of the real estate market. There are some that focus on residential mortgages and things like that. But that can really be a great diversifier because if you think about a business commercial real estate investment, typically those businesses can pass along inflation in the terms of higher rent increases, so they’re somewhat insulated from those inflationary forces.
And you can actually buy those in index forms, so you can get a lot of exposure to different REITs within a single package. For example, one of the vehicles that we often will use at SMI is just a simple Vanguard real estate investment trust or REIT index, which has the ticker symbol VNQ. So you buy that one ETF, or one like it, and you get...
Rob West:
Oh, I think we lost Mark. Oh, there you’re back. We lost you just for a second.
Mark Biller:
Sorry about that.
Rob West:
No, you’re fine. I got that — with the Vanguard index, and you could do that with any number of firms that offer indexes that track the movement of real estate investment trusts.
Well, Mark, this has been really helpful. Always appreciate you stopping by my friend.
Mark Biller:
Thanks so much, Rob.
Rob West:
All right. If you wanna learn more head over to soundmindinvesting.org. In fact, the article Mark’s been talking about today, Thinking Beyond Stocks and Bonds, is right there on that main page: soundmindinvesting.org. You can check it out.
We’re gonna be back with your questions on anything financial just around the corner. 800-525-7000. Stick around.
