I'm looking for diversification of my portfolio to be somewhat resilient w.r.t. crashes. As usual, I'm writing a bit of a preface before coming to the point.
As probably most investors are, I'm currently mainly invested in stocks, mostly several ETFs. I'm planning to rebalance soon, so I'm re-thinking how exactly. I'm -- compared to most recommendations -- currently a bit heavy on US stocks because it went so well in the last years so the position is larger than it was. I'm a bit heavy on Europe, but that's kind of on principle since I'm located there and like to be a bit Europe-heavy, and I'm certainly too low on rest of the world and Emerging Markets. I have a little bit in Government Bonds and Corporate Bonds, but that's not too much.
Now, everyone will agree at some point there will be a crash. So do I, but as everybody who is honest to themselves I have no idea when. Could be tomorrow, could be some point in the next year, could be in a couple years, could be in 10 years. I simply don't know, I'm not a fortune teller. If I knew when a crash will happen things would be very easy: Sell everything, go short, and buy again after the crash.
But what I do know is that when there is a crash, it's good to have some money to buy. I could set aside some war chest in cash and just wait. But that money will be slowly eaten by inflation and certainly not increase in value.
If I were to invest some of the money in other asset classes other than stocks, ideally some which would not go down the same as stocks in a stock market crash, I could gain some value, and when the crash comes just rebalance the extra cash I have there to stocks after the crash for added benefit.
If you think about it, that's diversification across asset classes. I've read a bit on Google what people recommend there, and here's a breakdown of possibilities, and my opinion on them:
- Government bonds (US and the stable European ones). The good news is they are not so correlated to the stock market. In fact, for the 2007/2008 crash, they've done very well. For the 2020 crash, they fell rapidly as well, although not as much as the stock market. They give some interest, but it's certainly very limited. Seems a bit better than just holding the cash, but not much. Also, if I'm investing in US government bonds (which pay better interest than e.g. German bonds) I have the currency risk. I could hedge that, but that would cost a bit of the meagre profit...
- Commodities/precious metals. I don't get that one. I understand that some of them might go up in a crash. But they don't generate any interest by themselves, it's pure speculation. An ounce of gold is just the same ounce of gold in 10 years. Under a lot of assumptions I could say that it might be a hedge against inflation and thus better than holding cash. But it's nothing that will provide any returns beyond inflation by just passively investing.
- Real Estate (direct investment). It's a shitload of work, it's very risky since it's hard to diversify unless you have a lot of cash to invest there. I don't want that.
- Real Estate (through REITs or Real Estate stocks/ETFs). Much easier to realize, but questionable how much it helps with diversification. The Real Estate ETFs all went down pretty much the same as the stock market last year, and while not many of them existed, the 2007/2008 crash was caused by real estate, so I don't expect this to have been very resilient (but I'm looking into whether the problem here is that weighting by market-cap might be a bad idea here...). This might be an asset class a bit more robust than the overall market, but I am skeptical. On top of that, I'm shocked about the dividend rates here, I expected a lot of them to be much higher. Adding a bit of that is likely fine.
- Tune weighting of industries/regions based on their performance in the last years. With that, I mean thoughts like: US stock market went extremely well the last years, so if there should be a crash, it has the biggest possibility to fail -> have less US. Consumer Staples and Energy did worse than the market the recent years -> more of those, since they won't fall as much in a crash. Tech stocks went exceptionally well, so they have the most potential to fall -> less of those. This will mitigate the risk (although I'm skeptical on the Energy part), I guess, but also limit growth for the current market situation.
- Cryptocurrencies. Surprisingly high correlation to the stock market if I look at the charts. They crashed last year. Also, they're pretty high right now and their intrinsic value is a bit questionable. I'm not completely against investing a small portion of my portfolio there, but I'm not overly convinced of this. If they had a clear negative correlation, it would show that they are regarded as an alternative when the traditional market fails. But I can't see that being the case right now.
- P2P lending. I'm skeptical. It's completely unregulated, so there's counterparty risk. It's hyped a lot by influencers, which rings alarm bells. And if I look at bondora, which seems to have shifted the focus to their "Gain&Grow" product, that gives 6.75% per year, but has a 1% withdrawal fee and a 400 EUR maximum investment per month, this looks fishy. This industry also had trouble last year, with withdrawal restrictions and higher default rates, so its resilience in crashes is also questionable. It's its own asset class, but lack of transparency and regulation make me be very hesitant here.
How do you diversify your asset classes? With what reasoning?
Submitted August 30, 2021 at 09:59AM by yldf https://ift.tt/3t0Phs5
