For decades, investors have put their financial future in the hands of a reliable old person: the 60/40 rule.
With 60% of your money in stocks, you will have enough growth potential to reach your goals. And with 40% bonds, you’ll have a steady source of income to lean on in case your stocks don’t perform.
At least, that’s conventional wisdom. The problem is, today’s investment landscape is completely different than it was 20 years ago, let alone 70 years ago.
What are the professionals saying now?
While it’s not universal, analysts at large companies like Bank of America, Morgan Stanley, and JPMorgan have all proclaimed the death of the 60/40 rule in recent years.
David Kelly, Chief Global Strategist at JP Morgan Asset Management, Says Plain Vanilla Portfolio of 60% Global Equities and 40% US Bonds Should Generate Annual Return only 4.2% over the next 10 to 15 years.
Why? The simple explanation is that today’s bond yields are tiny compared to the yields of yesteryear.
For example, the yield on a 10-year Treasury bill peaked at 15.84% in 1981. By the end of the decade, it had fallen to 9.5%. It is currently hovering 1.5% – not much better than some savings accounts or certificates of deposit.
As a result, many investors look beyond bonds to other low risk assets that still offer reasonable returns. Some even go beyond equities in search of higher growth potential which may take longer.
What alternatives exist?
Thanks in part to technological advances, the average investor today has access to many more options – it is even possible to invest with only your “spare currency”.
Here are five ways to inject more diversity into your portfolio, beyond just stocks and bonds:
If it’s good enough for one of the richest men on the planet, this is surely good enough for you.
Farmland can act as a shield against volatility – even when the economy is going through a recession, people still need to eat. And yet, there is evidence to show that you can expect better returns from farmland than bonds, gold, and often the stock market.
Using a new investment platform, you can join with other investors to buy stakes in individual farms without having to manage one yourself. You can get a reduction in rental costs and crop sales, which provides you with cash income as the asset’s value increases.
Exchange traded funds
Exchange-traded funds, or ETFs, combine the convenience of stocks with the diversification and reduced risk of mutual funds.
Instead of buying into a single company, you get a share of a number of different assets, such as stocks, commodities, and bonds. The typical ETF is based on a financial market index, like the S&P 500, and contains all of the individual stocks or other investments that make up the index.
ETFs can be bought and sold like stocks and tend to have lower fees than mutual funds.
Want to get a share of the booming real estate market right now, but can’t afford to buy a property or two?
A real estate investment trust, or REIT, will allow you to get your foot in the door without having to shell out your savings or commit to becoming a homeowner.
With as little as $ 500, you can help finance the purchase of commercial real estate developments and then reap the rewards. Who knows, this might put you on the path to buy your own house.
For the adventurous (and richer) investor, hedge funds can offer both diversification and superior returns.
These institutions are known to use unconventional and risky investment strategies that do not closely match the stock market. They often invest themselves in alternative assets, such as private companies, distressed debt, currencies and commodities.
While hedge funds are generally only open to qualified investors, some investment applications are trying to make hedge funds more accessible to everyone.
Investing in crypto is easier than you might think – you can buy bitcoin and other digital currencies through popular investment apps – but it’s not for everyone.
Yes, some people have made their fortunes through the incredible volatility, as a bitcoin is now worth tens of thousands of dollars. Meanwhile, billionaire investor Warren Buffett is calling things “squared rat poison,” pointing to its limited use as a form of currency.
The potential is there, but don’t invest more money than you can afford to lose on the next big swing.