While stock market performance has been mixed and the US dollar’s performance has been poor, there are a few funds that are designed to do well under exactly these conditions.
Obviously, when the stock market or dollar is strong, these funds will underperform. By building a balanced portfolio containing multiple asset types that do not move in unison, you will reduce the overall volatility of your portfolio and may improve its overall performance.
These investments tend to move in the OPPOSITE direction of the dollar and the stock market, and therefore are a way to offset the damage that these market forces could do to the rest of your portfolio.
Be sure to read the prospectuses and annual reports for these investments, understand that these investments are not, in themselves a balanced portfolio, and understand the types of risks involved in these investments. In fact, these investments are extremely volatile and the idea here is that a very small investment in one of these volatile investments will help balance out a much larger portfolio, as a sort of insurance.
So what types of assets do well in this type of market?
- Over the past 5 years, the British Pound has gone up 20% against the US dollar, or the dollar has depreciated proportionately against the Pound, depending on how you want to look at it. If you simply held short term notes or similar risk-free money-market investments denominated in Pounds, you would get the interest income from those investments and would see a 20% gain in the value of your investment in terms of dollars. Looking at it another way, the value of your investment in terms of international purchasing value would be preserved while you received what is considered a normal risk-free return in Great Britain.The problem with selecting a single foreign currency is the uncertainty of how the dollar will perform against a single currency, so you are better off diversifying with a selection of Western currencies, including the Pound, the Euro, the Swiss Franc, and the Canadian dollar. This is easier to accomplish at an international bank than most American banks or brokers.
- On the other hand, over the past 5 years, the price of gold has gone from $350 to $931, or a 166% increase, though it would not provide you with any income during that time. Instead, a small investment in gold can offset fluctuations in a much larger portfolio.
- An even more volatile investment is gold stocks, which move up and down with the value of gold, but which amplify these changes due to the large impact that a moderate change in the price of gold has on their profitability. The problem up to now is that it is difficult to put together a small diversified portfolio of gold stocks that do not dampen fluctuations in the price of gold through the use of hedging. There is now an exchange traded fund known as GDX, which provides maximum volatility compared to the price of gold.
- There are also funds known as “bear funds” that engage in short trading of stocks, and can go up in value when the stock market goes down (do a google search on the term “actively-managed short mutual fund” to find an example of such a fund).
Caution:
Under favorable stock market conditions. these investments can perform very poorly, resulting in significant losses. They are not balanced investments, and their ability to fluctuate widely in price allows you to use a small investment to balance a much larger portfolio.
These strategies are for experienced investors who understand the concepts of balancing a portfolio using dissimilar and volatile asset classes. I recommend that you get professional advice in putting together a balanced portfolio that matches your investment objectives and risk tolarance.
Remember that every fund will perform differently under different market conditions, not every investment is right for everyone, and past performance is no guarantee of future results.
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