A noted investment adviser likes to ease his clients’ pain when the value of their portfolio dips by uttering this comment: “Don’t worry. Your portfolio will do just fine. After all, this is America. The stocks in your fund will come back.”
Easy for him to say. He makes his commission or fee whether the stocks come back or not. But what if you happen to be one of his clients? What should you do? Well, you can take his advice, pour yourself a stiff vodka tonic, and wait until the market rebounds. You can get aggressive and buy more of the same. The ostensible strategy here is that if ABC was a great stock to buy at, say, $47 per share, it’s an even better buy at $38 per share. If you’re really aggressive, you can say to your broker or adviser “OK, let’s pull out all the stops, and double up with an ABC stock purchase on margin.”
Or you can hedge your portfolio and invest in hard assets. Don’t hold your breath though and wait for your broker to make this suggestion. It’s unlikely he handles hard assets. You’ll want to do a bit of research on your own.
Don’t hold your breath though and wait for your broker to make this suggestion.
Traditionally, the phrase “hard assets” refers to diamonds, real estate, precious metals, oil, and other commodities. But it’s also fair to say that while Warren Buffett’s recent purchase of a railroad doesn’t exactly qualify as a venture into hard assets, his decision was based on his understanding of a railroad’s value as vital in the transportation of coal, diesel fuel, and other hard assets.
A strong argument can be made that the value of hard assets is inversely tied to that of the stock market. This is particularly true when inflation takes hold. At first, stocks will move up in periods of inflation, because companies can pass on their own increased costs to their customers. There comes a point though when their customers will back off, and the market for equities will flatten. At this point, those holding hard assets will find their investments appreciating, because they possess those very items that are rising in price.
For those who can wait and are not troubled by lack of liquidity, real estate can prove an excellent investment. Owning residential or commercial property can prove lucrative, provided one hires a good professional manager to oversee the property. As inflation takes hold, rentals and property prices can move up accordingly.
Ownership of physical precious metals can provide additional good opportunities for an investor. Gold is particularly favored among seasoned investors, because its price is negatively correlated to the value of the dollar. As governments print money, the price of gold invariably rises. Investors also favor gold because they consider it “portable wealth.” It can be moved from one country to another with relative ease.
Equity and bond sales people are quick to point out that gold does not pay interest. While that may be true, bond yields are now low, and will probably remain low for a long time. Also, equities and bonds are inextricably tied to the value of the dollar.
Holders of hard assets can feel confident over time. A portfolio exclusively devoted to stocks and bonds is not a recommended recipe for a good night’s sleep, particularly in our current economy.