The following is a guest post from Troy Bombardia from BullMarkets.co
The current bull market and economic cycle are extremely stretched. But remember that bull markets don’t die of old age – they die of excess. And although economic and market excess aren’t as high as they were in 2000 or 2007, excess is starting to creep in. You can see this slowly rising excess in rising debt, rising valuations, etc.
But the key point is that although these signs of excess are concerns, they are not significant enough to end the bull market in stocks and economic expansion right now. This means that although the economic expansion and bull market are getting old, they still have a few years left.
Here are the best ways to invest during the final few years of an economic expansion.
Inflation tends to rise during the final few years of a bull market and economic expansion. See the chart below.
Hence, the first and foremost goal of any medium-long term investor is to protect his or her portfolio from rising inflation. Investors in bonds with short durations (e.g. short term Treasury bonds) typically lose money because short term interest rates rise when inflation rises.
This is why inflation-wary investors should invest in TIPS. TIPS (Treasury Inflation Protected Securities) are bonds whose value rise when inflation is rising. You are paid a fixed rate of interest on a TIPS. However, the principal that you receive when the bond matures increases if inflation rises. So when inflation goes up, investors in TIPS are rewarded.
This is one market that many equities investors overlook. Commodity prices tend to rise when inflation is rising. This inherently makes sense. Headline inflation (CPI) is strongly driven by the year-over-year change in oil prices. Since oil and commodity prices tend to move in the same direction in the long term, this implies that the entire commodities family will do well when inflation and oil rises.
There are multiple ways investors can get involved with commodities. The easiest method is to buy ETFs. For example, gold has the ETF GLD, silver has the ETF SLV, and oil has the ETF USO.
There’s another reason why oil is doing particularly well right now. The 2014-2016 decline in oil put a large hole in Saudi Arabia’s and other OPEC nations’ budget. Many OPEC nations need oil to be $70-80 a barrel just to breakeven. Hence, OPEC continues to curb its supply in an effort to drive oil prices higher.
So if you want to protect your portfolio from rising inflation over the next few years, invest in some commodities.
Dividend stocks are safer than growth stocks when it’s getting late in the bull market and economic cycle. It’s not possible to exactly pinpoint when the bull market will end and when the bear market will begin. All we can do is estimate the turning point in the long term trend.
So if you want to be on the safe side, consider switching your portfolio from growth stocks to dividend stocks. Growth stocks (tech and FANG stocks in particular) will continue to outperform as long as this bull market continues. But once this bull market ends, growth stocks will fall more than the broad index. Growth stocks tend to be high beta stocks, which means that they are more volatile than the broad stock market.
Dividend stocks don’t rise as much as growth stocks during bull markets. But they also don’t fall as much as growth stocks during bear markets. And at the very least, dividend investors will earn the dividend yield when a bear market occurs.
This is one area where I want to caution long term investors. I’m seeing this pop up a lot nowadays. Real estate prices have gone up for the past 10 years, and many people are seeing real estate investing as the holy grail to a solid portfolio.
The reality is that real estate has its cycles too – there are strong boom and bust cycles that older people will remember. Keep in mind that:
- Interest rates are going up, so mortgage payments will become more expensive as the Fed raises rates.
- Real estate prices in many places are already sky high.
- The price-to-rent ratio is not rising as fast as prices, which means that yields on real estate investing are going down.
So be careful with real estate investing during the last few years of a bull market. Do not plow most of your life savings into this market.
Thank you for reading! I’m Troy Bombardia, a professional trader who blogs about bull markets, bear markets, and everything in between.