Diversifying Without Stocks and Bonds
By Brad Thomason, CPA
1/27/2015
Bonds don’t pay much right now. Stock prices have seen a boom the past few years, but people are now growing nervous about whether or not a reversal is on the way.
The US financial press is overwhelmingly oriented toward the idea of stock+bond portfolios. This is also what you see in the majority of client cases. It’s not exactly clear which one causes the other. But the supremacy of the stock/bond paradigm is not up for debate.
For many years, a portfolio of stocks and bonds did a fine job of getting a person ready to retire. But it’s now been about 15 years since it worked as well as it used to. It may be an exaggeration to say that the approach is a “outdated by a generation,” but it has been awhile since it worked as well as it used to, and there aren’t any stark indications of change on the horizon.
The value of stocks is up a lot since the financial crisis in 2008. But if you look at the growth since the late 1990s it really not that great. That’s because the first 10 years or so of this new century were basically a flat line in stock returns. That’s on a net basis. Flat didn’t mean boring though: we got to watch the market lose 40%+ twice during that period.
Bonds don’t pay anything right now. Some people blame the Federal Reserve, though it’s probably good to note that interest rates of all kinds, all over the world, are low and have been for many years. Interest is the fee that people pay to use someone else’s capital. The market simply doesn’t demand a very high price for using capital right now, so investor yields suffer.
These days it’s really not that tough to convince most investors that the traditional mix has some challenges. Strangely, convincing them to consider other alternatives can be tough, though. It’s hard to overcome the inertia of tradition, and often times people are more comfortable suffering along with everyone else than they are striking out in a new direction which might make them look odd to their old crowd.
Those who do though, find out pretty quickly that the world is made up of more than two asset classes. And many of them have decidedly better risk and return features than the current proposition from the incumbents.