Baby Boomer Protective Investments Exclude Stocks and Bonds

• Stocks are overpriced and likely to crash in this decade. Bonds are risky too.
• Baby boomers might not live long enough to  wait out the next stock market crash. “Stay the course” and “Buy the dip” do not work for baby boomers.
• Baby boomers should move out of stocks and bonds and either (1) hold other assets or (2) hedge their stocks and bonds

Last week’s tumultuous stock market shocked investors, even though the return on the Dow for the week was a remarkable 2.2% (that’s more than 200% annualized). All’s well that ends well. Or is it?

Baby boomers should use this experience as a “wake-up call” to examine the risk in their investments. Last week might have been a head fake or a warning of more to come – a pre-shock. A stock market crash will happen, and is long overdue.

Dr. Wade Pfau, Professor of Retirement Income, Calls Bonds Useless and Equities Risky. In my previous newsletters I’ve warned baby boomers that they cannot afford to take investment risks at this time in their lives because they are in the Retirement Risk Zone when Sequence of Return Risk can spoil the rest of their lives.  So, what can baby boomers invest in to protect themselves and earn a decent return?

I discuss two choices: (1) replacing stocks and bonds, and (2) hedging your stocks and bonds.

Portfolios that don’t hold stocks and bonds

If you’re not going to hold stocks and bonds , there’s a long list of investments you could hold. The following should protect against inflation: real estate, precious metals, commodities, natural resources, agriculture and, yes, even cryptocurrencies.

Some mix of these assets could make up your risky portfolio,  instead of stocks.

To control risk, you’ll want to use inflation protected low risk assets like short-to-intermediate TIPS (Treasury Inflation-Protected Securities), instead of long-term traditional bonds.

For guidance on the blending, you could look to the Talmud that advises a third in land, a third in business and a third in reserve. In this case  the third in business would be inflation protected assets. The third in land needs to be protected against current overpricing and oversupply in real estate. You can include equity in your home.

 The initial portfolio would look something like the following:

Risk can be managed by combining these two portfolios, moving more or less into the Stabilization portfolio to decrease or increase risk. You can tinker with the sample allocations based on your comfort and understanding.

Hedging

A simple, but very expensive, choice would be to hire some hedge fund managers or a fund-of-fund of hedge funds. You’ll need to be a qualified investor to do so, which means you’ll need to be among the 5% richest people in America.

But there are plenty of tools available to do your own hedging, including:

• Sell short
• Buy put options or sell call options
• Buy ETFs that bet against the stock market like SPXS
• Buy ETFs that profit from interest rate increases like PFIX
• Buy buffered ETFs like Innovator’s
• Buy volatility, like the VIX 

The list goes on.

You control the amount of the hedge. In hedge fund parlance your “direction” can be long or short, which means you are betting for or against the market. You control the size of your bet by the mix.

If you don’t hold stocks or bonds, and only hold the instruments listed above, you are “short” stocks and bonds which means you are betting against those markets – that those markets will lose value.

Conclusion

Those who are familiar with my articles know that I see market crashes in stocks and bonds occurring in this decade, combined with serious inflation. Readers ask how I recommend protecting against this eventuality. This is how.

More By This Author:

Baby Boomers Vs. Greater Fools
Baby Boomers Better Get Out Of The Stock Market Now
Large Cap US Stocks Continue Their Stratospheric Rise In 2024. It’s The Roaring 20s – Again.