Week 44: Wild Card Topic

What can you do this week?

• If your strategy is mostly U.S. Large stock and Intermediate Term Bonds, there are many ways to diversify your asset mix.

• Especially if you are looking to invest where there is opportunity to reduce risk, it may be worth exploring alternative assets to invest in.

Investing Only In The S&P 500 Gets Risky After Awhile

• Popular advice in the media at a minimum, is all you need is the S&P 500 for a diversified portfolio.

• Below is only one chart example but in blue you see the S&P 500 the past 10 years, the global stock market in orange, and total international stocks in red.

• While no one knows what is next, if you are heavily or entirely invested in the S&P 500 with an index fund or ETF or a Total Market Index Fund, it could be time to look at how to diversify some of the gains made to other asset classes.

• The concept of Reversion to the Mean could be due for many U.S. investors.

• There are ways to invest away from the S&P 500 if you’re looking to reduce risk and retain gains you’ve made in recent months and years.

Why Invest In Alternatives

• Correlation is an attempt to measure the relationship between two investments and how they might perform comparatively. This is helpful if you want diversification and reduce risk of all your investments losing at the same time.

• “A correlation coefficient greater than zero indicates a positive relationship while a value less than zero signifies a negative relationship.

• A value close to zero indicates a weak relationship between the two variables being compared.

• A negative, or inverse, correlation is a key concept in the creation of diversified portfolios that can better withstand portfolio volatility.”

  
  

Sometimes They Are Not An Option

• Many investments require that you be an accredited investor:

  • “A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

  • A natural person who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.2

    Electronic Code of Federal Regulations. "Title 17: Commodity and Securities Exchanges. Chapter II. Part 230. §230.501 Definitions and Terms Used in Regulation D."

• They can often be illiquid, meaning you may not be able to access your invested capital quickly like you can with publicly traded stocks and funds.

• They may not be necessary. Investors can still reach their goals without adding the complexity of new investment asset classes, especially if you’re just starting out with small investment balances.

Where To Start?

• What follows are (mostly but not all of them ) some alternative investments that any retail investor could access.

• This may mean the correlation benefits and potential diversification may not be as impactful compared to private alternatives.

These examples are for general educational purposes and not an investment recommendation for any particular security.

Correlation is vs. S&P 500 over the past 5 years where available. The closer the correlation is to 1.00, the more it has behaved like the S&P 500.

The S&P 500 - An Example, VOO

• Correlation: Positive (+1.00)

• Yield: 1.24%

• Overview: The S&P 500 is a stock market index that tracks the performance of 500 large U.S. companies. It’s often seen as a proxy for the stock market, for better or worse.

• Considerations: The S&P 500 index is U.S. Large company exposure only which has been very favorable in recent history but we all know that can reverse trend too.

1. Cryptocurrency - An Example, IBIT

• Correlation: (+0.58) from 2/24-10/24

• Yield: N/A

• Overview: While Bitcoin and Ethereum remain highly volatile, they tend to move independently from traditional markets. Recent trends show some correlation with equities, though it’s still low overall.

• Considerations: High volatility and regulatory uncertainty can make crypto investments risky, yet they’re appealing to investors seeking speculative investing opportunities.

2. Farmland - An Example, GLAD

• Correlation: (+0.54)

• Yield: 4.68%

• Overview: Farmland investments are backed by agricultural productivity, offering stability and income through lease payments. Farmland investments have shown less connection with the stock market and are popular for hedging against inflation.

• Considerations: Farmland can be illiquid, and returns are moderate, so this option suits those with a long-term outlook.

3. Wine - Some Examples Here

• Correlation: Varies

• Overview: Fine wine is an interesting alternative asset with a steady appreciation rate and low correlation to stock markets. Platforms allow investors to buy fractional shares of wine collections.

• Considerations: Wine must be stored carefully, and it may not appreciate quickly, making it a suitable choice for patient, niche investors.

4. Hedge Funds: An Example, RLY

• Correlation: (+0.75)

• Yield: 3.56%

• Overview: Hedge funds use diverse strategies, including short-selling, arbitrage, and alternative credit, often exhibiting a lower correlation with the S&P 500.

• Considerations: Hedge funds may require high minimum investments and are accessible mainly to accredited investors, along with high fees and lower liquidity.

5. Precious Metals: An Example, GLTR

• Correlation: (+0.19)

• Yield: N/A

• Overview: Gold and silver have long been safe-haven assets, particularly during economic downturns. While they aren’t completely uncorrelated, they tend to perform inversely to the S&P 500 during crises.

• Considerations: Precious metals don’t generate income, and price fluctuations can be driven by global sentiment as much as demand, making them more suited for stability rather than high growth.

6. Private Equity: An Example, PSP

• Correlation: (+0.89)

• Yield: 7.71%

• Overview: Private equity offers access to non-public companies and can deliver high returns, though with medium correlation to the stock market.

• Considerations: Private equity is generally illiquid and can have long holding periods, often reserved for high-net-worth investors due to the capital requirements.

7. Real Estate: An Example, RWO

• Correlation: (+0.77)

• Overview: Direct real estate investments, REITs, and other real estate-based assets provide both appreciation and income potential. Real estate typically has a low to moderate correlation with stocks, offering steady returns and inflation protection.

• Considerations: Real estate can be illiquid, although REITs improve liquidity. Economic factors and interest rates can heavily impact this sector.

8. Commodities: An Example, BCD

• Correlation: (+0.46)

• Yield: 4.38%

• Overview: Commodities like oil, agricultural products, and metals tend to have a moderate correlation with the S&P 500, particularly as they react to global demand and inflation factors.

• Considerations: Commodities are highly sensitive to supply and demand shifts and can be volatile, often used to diversify and hedge against inflation.

9. Infrastructure Investments: An Example, PAVE

• Correlation: (+0.89)

• Yield: 0.54%

• Overview: Investments in infrastructure projects like utilities, transportation, and energy often move in tandem with economic growth, resulting in moderate correlation with stock indices.

• Considerations: Infrastructure offers steady cash flows but may be affected by policy changes and economic cycles, making it suitable for income-focused investors.

10. Currency Investments: An Example, FXF

• Correlation: (+0.32)

• Yield: 0.05%

• Overview: Investments in infrastructure projects like utilities, transportation, and energy often move in tandem with economic growth, resulting in moderate correlation with stock indices.

• Considerations: Infrastructure offers steady cash flows but may be affected by policy changes and economic cycles, making it suitable for income-focused investors.

11. Rare Earth Investments: An Example, URA

• Correlation: (+0.50)

• Yield: 5.61%

• Overview: Rare earth elements, essential in technology manufacturing and green energy applications, show low correlation with the S&P 500. While demand for these elements is influenced by tech and green industries, supply dynamics and geopolitical issues tend to be the primary drivers of rare earth prices, giving them a unique movement profile.

• Considerations: Rare earth investments can provide exposure to emerging tech sectors and may offer a hedge against global technology market demand fluctuations. Their low correlation with the S&P 500 makes them attractive for diversifying a traditional portfolio.

12. Timberland Investments: An Example, WOOD

• Correlation: (+0.80)

• Yield: 1.61%

• Overview: Timberland investments have demonstrated a low to moderate correlation with the S&P 500. Since timberland generates income through the sale of timber and benefits from biological growth, it’s less reliant on short-term economic trends. However, its correlation can increase during inflationary periods when timber and land values rise.

• Considerations: Timberland can act as an inflation hedge and provide steady income through timber sales, offering lower market correlation and resilience during economic downturns. It’s a long-term investment with unique, low-market dynamics.

13. Oil Investments: An Example, DBO

• Correlation: (+0.43)

• Yield: 4.50%

• Overview: Oil is often influenced by global demand, production levels, and geopolitical events, which means it can move with the market or diverge in cases of supply shocks. Its correlation with the S&P 500 has fluctuated over the past five years, sometimes showing a strong connection to economic trends and at other times reacting to unique supply-side influences.

• Considerations: Oil can be a lucrative investment during periods of high demand and constrained supply. However, its price volatility and moderate correlation with the S&P 500 make it a more complex option for portfolio diversification.

14. Natural Gas Pipeline MLP Investments: An Example, GUNR

• Correlation: (+0.75)

• Yield: 3.54%

• Overview: Investments in infrastructure projects like utilities, transportation, and energy often move in tandem with economic growth, resulting in moderate correlation with stock indices.

• Considerations: Infrastructure offers steady cash flows but may be affected by policy changes and economic cycles, making it suitable for income-focused investors.

15. Art Investments: An Example, Masterworks

• Correlation: Varies

• Yield: Varies

• Overview: Art investments are known for their very low correlation to the S&P 500, as prices are influenced by factors like artist reputation, rarity, cultural trends, and buyer demand. The art market operates independently of stock market forces, providing a valuable means of diversification.

• Considerations: Art can act as a hedge against market volatility and inflation, offering portfolio stability over the long term. However, it requires significant knowledge, patience, and may involve higher transaction costs.

• Above is the tool used to get an idea of the correlation of assets before you invest if you’re curious to do the same yourself.

To learn more about my services, checkout my website and schedule a call.

If you’re not a subscriber already, hit that button below to receive new tactics each week to help you grow income, reduce expenses, and save more now!

If you know others who would benefit from this content, please share the newsletter URL link on your social channels!!