10 Portfolio Must-Haves For The Next 5 Years

10 Portfolio Must-Haves For The Next 5 Years
Theodora Lee Joseph, CFA

over 1 year ago3 mins

  • If you’re looking to keep your portfolio steady in the next few years, you might want to look at low beta stocks, which perform well in times of high volatility.

  • Some bonds look pretty promising too: TIPS move up and down in line with inflation, and floating bonds move in tandem with particular indexes.

  • You might also want to think about alternative assets like wine, carbon credits, litigation finance, and music royalties, as well as some carefully selected raw materials.

If you’re looking to keep your portfolio steady in the next few years, you might want to look at low beta stocks, which perform well in times of high volatility.

Some bonds look pretty promising too: TIPS move up and down in line with inflation, and floating bonds move in tandem with particular indexes.

You might also want to think about alternative assets like wine, carbon credits, litigation finance, and music royalties, as well as some carefully selected raw materials.

You’re in for a challenging few years: the market is in the throes of peak growth, rising interest rates, high inflation, and low market returns. And while no one’s entirely sure how long this environment might last, now seems as good a time as any to prep your portfolio as if it’s here for the long haul.

Stocks: Low beta stocks

Tech companies might not be the hero they’ve been in the past, but one group of stocks could still save the day: those with a low “beta”.

A stock with a beta lower than one indicates that it’s less volatile, meaning it’s less likely to drop in price when the wider market goes down. Low beta stocks work best when you’re not sure how long and damaging a potential economic recession will be – exactly the sort of backdrop you can expect over the next five years.

Low beta stocks are often found in defensive sectors like utilities and consumer staples. Alternatively, you could gain exposure by opting for a low volatility exchange-traded fund, like the SPDR STOXX Global Low Volatility UCITS ETF (GLOW, expense ratio: 0.3%) and the iShares Edge MSCI World Minimum Volatility UCITS ETF USD (MINV, 0.3%).

Bonds: TIPS and floaters

Treasury inflation-protected securities – or TIPS – are US government bonds that rise in value with inflation, meaning they’re tailor-made to protect your portfolio no matter how high prices go from here. If you hold a TIPS to maturity, you’ll always at least make back your original investment. You can either buy different maturities of TIPS individually, or a mix of them through ETFs like the iShares 0-5 Year TIPS Bond ETF (STIP, expense ratio: 0.03%).

Floating-rate bonds – or “floaters” – offer higher returns than TIPs (although at a higher risk), while holding their own if interest rate hikes succeed in bringing down inflation. Floaters are bonds that pay interest based on a predetermined benchmark, like the fed funds rate or the consumer price index. So depending whether you want to hedge against inflation or interest rate hikes, you can choose a floater indexed to that measure.

Alternatives: Music royalties, carbon credits, wine, and litigation finance

Alternative investments are a great way to grow your money in the long run, since they’re generally less tied to stock market movements. A five-year roadmap works perfectly for alternatives: you’ll have time to soak up their steady stream of income, as well as benefit from their potential price appreciation.

Private equity, hedge funds, and real estate might be the most popular alternatives for now, but they’re becoming increasingly correlated to the wider market – both as central banks tamper with them and as they become more securitized. So if you’re looking for diversification, you’d be better off thinking a little more laterally: try music royalties, carbon credits, wine, and litigation finance.

Commodities: Gold, silver, and energy

Commodities are a double-edged sword: they can work as a good inflation hedge, but demand for them – and their prices – can fall steeply in a recession. Likewise, a strong US dollar has historically been bad for commodity prices: commodities are usually priced in the currency, which means prices rise and demand from non-dollar consumers tends to fall.

But we’re looking at the next five years here, and commodities could be a strong investment over that timeframe. That’s especially true since there’s been a historic underinvestment in the extraction of certain raw materials, meaning supply looks set to eventually run low.

Just remember to be selective in your choice of commodities: precious metals like gold and silver are unlikely to appreciate in price like more volatile metals – nickel, copper, and cobalt – could, but they’re a much more solid inflation hedge. The scarce supply of oil and gas, meanwhile, might make each of those good investments, so long as you don’t expect the energy transition to kick up a gear anytime soon.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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