Looking Beyond Stocks and Bonds for Portfolio Defense

Are there options aside from stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. and bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. to consider during this period of market volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in.? Other than cash, what are some defensive plays? Senior Research Analyst Liz Laprade discussed alternative investments in our recent webinar,* Stocks, Bonds and the Fog of War—Our Investment Perspective.   

Please enjoy the excerpt below and click here for the full webinar replay to hear more. 

Liz Laprade:

There are options beyond stocks and bonds. And if your definition of “defensive” is a store of value, then there isn’t anything better than cash. It’s the only thing that guarantees you put a dollar in, you’re going to get that dollar back out. Those are my short answers.

The longer answer to both is that there are parts of the market outside stocks, bonds and cash that can behave differently. I’m talking about alternatives. Commodities and real estate, for example, are illiquid alternatives. Those investments could act as defense at times in the sense that they could be up when stocks and bonds are down.

But they are not defensive in the sense that they are good stores of value. And that’s because most of those options, while potentially offering diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not. in down markets, can also exaggerate the downside more than stocks and a lot more than bonds.

For example, commodities are up year-to-date, while stocks and bonds are down. However, if you take March 2020’s sell-off as an example, stocks were down about 30%, the iShares Commodity ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. was down 35% and the Bloomberg Aggregate BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. Index was only down 7%. While stocks and bonds both being down last quarter was definitely frustrating, if rare, I still think of bonds as the best defense for our portfolio after cash.

Bitcoin is not, in my mind, a safe store of value; therefore, it is not an appropriate swap for cash. Bitcoin is so volatile that if you’re going to own it in a portfolio, I would group it into the alternative space—because it might behave differently than stocks, bonds and cash. If you’re going to hold bitcoin, I suggest that you be comfortable with it losing up to 50% of its value at times, because that has happened. I don’t think bitcoin was ever meant to be a swap for cash, though I do think it’s possible that a digital dollar might exist in the future.

We know the government is taking crypto a bit more seriously. President Biden’s recent executive order requires various organizations to do in-depth research into offering a digital dollar. How that works and what it looks like, I don’t know. But I don’t think bitcoin by itself will replace the U.S. dollar or should replace someone’s defensive store value part of their portfolio.

Click here for a replay of StocksA financial instrument giving the holder a proportion of the ownership and earnings of a company., BondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. and the Fog of War—Our Investment Perspective. Please contact us at (800) 492-6868 to learn more about comprehensive wealth management solutions.