First, recognize that equities are only one asset class (add bonds and we are at two asset classes) among a variety of potential investment vehicles. Some of those other designs may prove better suited to other investment environments, such as long periods of escalating inflation or a rambunctious property market, both of which periodically emerge in our economy and could be among the qualities that distinguish the next 40 years.
While only hindsight is 20-20, today’s equity investors owe it to themselves to explore new ways to diversify their portfolios. Perhaps the new guidelines will extend beyond traditional equity classes, such as technology, international funds and small-cap holdings.
To that end, we’ll examine adding two additional asset classes to a traditional equity-based portfolio:
- Precious metals, specifically gold: Gold has a design that enables it to respond positively (increase in value) when inflation starts becoming embedded in the economy, and also when leading governments appear to have lost the discipline to keep additions to their paper (fiat) money creation within bounds. While anecdotally we know this is true over the last 12 years (see “Jump on the bandwagon,” below), more in-depth analysis shows these periods will occur sporadically.
- Real Estate Investment Trusts (REITS): These offer an investment vehicle to take advantage of a property market on a tear.