Will Bonds Save the Day? Not in 2022
As seasoned investors already know, interest rates have been on the decline for years. The benchmark 10-year U.S. Treasury Bond rates hit their peak in the early 1980s. With rates on the rise, bond prices will fall, therefore you need to find the best bond alternatives for your portfolio for the next several years. A financial expert Rob Isbitts who we spoke with shares some insight on how to replace bonds
While investors have traditionally relied on bonds for their safety and relative predictability, as time has shown, low bond returns are essentially unavoidable. Remember, there is no guarantee when it comes to investing. Bond yields are as unpredictable as traditional mid-level to high-risk stocks at this point.
Yes, bonds were considered safe and easy, but as a wise man once said, “times they are a-changing.” You, as an investor, need to change with them, or you just might find the value of your portfolio on the decline, just like those yields.
However, there are ways to help you to mitigate risk and position yourself toward those greener pastures. What do you know about building an alternative bond portfolio? Well, I’m here to tell you about fruitful bond alternatives and how to build a strong portfolio using them.
Is it Safe to Continue Investing in Bonds? The Burden of Risk
First things first. Even at low rates, low returns are even worse. However, if rates rise, you will see chaos ensue as investors see bonds lose value for the first time. This impact can be much worse if it comes at a time when you need that safety net more than ever.
Or, in a worst-case scenario, we see rates drop into the negatives like in other nations, but that would be extreme and would negate any potential whatsoever for returns.
Counting on bonds as the perfect supplement to traditional stocks will more than likely provide disappointing returns. In fact, the risk of severely insufficient bond returns is much greater than at any other time.
And I hope that you were not holding high-yield, municipal and corporate bonds as a proverbial “ace” up your sleeve. These, too, are at all-time historical lows. Not to mention the additional matter of accompanying credit risk.
A Crash Course in Creating a Bond Replacement Portfolio
Now let’s discuss how to replace bonds. Regarding previously sought-after outcomes using bonds, such as annuities, this has nothing to do with that. There are other ways to replace the same investment experience without using bonds.
I have used a very successful approach with each of my clients for many years. Right now, I’m going to share it with you. This approach omits bonds and instead uses stocks and ETFs as alternative bonds. Anyone can buy these securities when the stock market is open, from 9:30 AM through 4:00 PM.
This strategy entails two primary components.
- Component A: Create income and achieve steady growth
- Component B: Secure your capital from any large drops in value
Creating Income and Achieving Steady Growth
This component is highly flexible and fluid. It is more about your own personal tastes than anything. And there is a very good reason for this that I’ll share with you later.
So, given that there are more than 3,000 individual stocks listed on the US Stock Exchange and thousands more worldwide, you can amass a collection of these. Doing this will help you make up that missing bond interest with dividends.
Or you can look at this endeavor based on total returns, making income and capital gains front and center.
Likewise, you can always apply an ETF strategy or mutual funds as these mitigate the risk of owning single stocks since these are groups of securities that come wrapped in a neat little bow.
Now, as to why keeping your plan fluid is a good idea. The main point of this component is that you do not have to lock yourself into one plan or direction. During times of change, changing flow becomes essential. Constantly changing direction in keeping with the tides will keep you moving forward instead of sinking in one place. Don’t tie a weight onto your legs; let change be your life raft during stormy weather.
Secure Your Capital from Dropping in Value
Now to actually replace those bonds. First, we will illuminate a few ways to rebuild your portfolio in a manner that will diversify to help ensure you have something that will rise if something from your income component drops. This will help to offset the risk and keep your portfolio from sinking.
The first is mitigating some risk through “hedging.” Because single inverse ETFs tend to travel in the opposite direction of the market index, you can mitigate some risk of owning great performing EFTs when you are not confident that the market itself will continue moving upward.
If you are a bit of a gambler, on the other hand, options can be cost-effective. They do, however, carry the risk of volatility, and time limits, for example, so you do need a fair amount of education in this area. D your homework if you choose this route.
You can also use cash in combination with hedging to make a potent safeguard for your income and growth plan.
While cash investing into money markets or short-term US Treasuries yields next to nothing, the security you’ll have when combing with hedging can be potent defensive tools.
To sum up your crash course in alternative bond portfolios, the main goal is to find investments that can create passive income in a manner that embodies both offensive and defensive investment planning and opportunities.
The Absolute Best Bond Alternatives in 2022
Now let’s get down to the nitty-gritty. We’ve covered the basics; why you need to get away from bonds, how to diversify for both offense and defense, and some ways to accomplish driving your personal financial goals forward using alternative methods. Now let’s talk about the best bond alternatives in 2022.
Let’s start with Master Limited Partnerships (MLPs). An MLP, simply put, is a partnership between general partners and limited partners. How does it work? Well, essentially, the general partners manage the day-to-day operations. Their stake is usually minor, while the investors provide most of the capital. MLPs are traded on an exchange, but instead of selling shares, they sell units. Every unit grants investors a share of the produced income.
Now let’s move on to Real Estate Investment Trusts (REITs). These are probably the most popular bond alternative around. It’s definitely the oldest. It allows investors to invest funds, which in turn, manage a portfolio of either commercial or residential properties or a combination of both. With a REIT, the best part is that a true professional manages a portfolio with up to hundreds of properties while the investors receive 90% of the profits.
As a technical investor position, you may not think is one, could become your favorite during short periods of market weakness and bear markets. This can be a cash position or possibly an inverse ETF to profit from falling prices. TTI is an ETF bond alternative for the passive investor who wants maximum long-term growth without the worry of bear markets or falling bond prices.
Finally, we have Business Development Companies (BDCs). How do BDCs work? Let’s break it down. A BDC is only allowed to invest in small to medium-sized businesses. A BDC must also offer assistance to the owner of the business. However, like REITs, BDCs payout 90% of its earnings (or more) to its shareholders. Why do they do this, and how can they afford to do so? Good question. They are able to payout 90%+ of their earnings due to the generous tax advantages they receive from the government, they are able to use leverage, and they are able to accumulate large amounts of money from public markets.
Want To Learn More About Bond Alternatives?
A friend of mine Rob Isbitts, has spent the past 35 years as an ETF investment strategist, former advisor, researcher, thought-leader, and journalist. Through his hard work, he is currently garnering a reputation talking about Bond Replacements. The Total ETF Portfolio Strategy is what we use to do this.
Recently we hosted Rob as our inaugural guest on TheTechnicalTraders Podcast. To have a listen, click on the link below:
The bond alternative Bottom Line
Here’s the bottom line. The interest we are used to getting from bonds as a traditional means of “safe investing” is plummeting. The days of using bonds as a safety net are over. As scary as that sounds, there are ways to continue accumulating money via passive income while still mitigating some of the market risks. By utilizing defensive and offensive approaches, diversifying through EFTs, and looking toward assembling a basket of securities, you will not only weather the winds of change; you can use these winds to chart a new course through open waters and, eventually, sailing to safer shores.
KNOWLEDGE, WISDOM, AND APPLICATION ARE NEEDED
It is important to understand that we are not saying the market has topped and is headed lower. This article is to shed light on some interesting analyses of which you should be aware. As technical traders, we follow price only, and when a new trend has been confirmed, we will change our positions accordingly. We provide our ETF trades to our subscribers, and in the last six trades we entered this month, five have been closed at a profit, one remains open, and we have locked in partial profits on that one as well! Our models continually track price action in a multitude of markets, asset classes, and global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.
Successfully trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.
WHAT STRATEGIES CAN HELP YOU NAVIGATE THE CURRENT MARKET TRENDS with bond alternative ETF position?
Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.
We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies as bond alternatives to profit during rising and falling market conditions. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com
Chief Market Strategist
Founder of TheTechnicalTraders.com