How to Prepare Your Portfolio for a Market Downturn With Real AssetsAcross the board, investors are increasingly looking for non-correlated assets to help cushion their portfolios in times of volatility. Here's why real assets can present an attractive opportunity for investors in 2023 and beyond.
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Forecasters are growing increasingly confident that a large-scale economic downturn is imminent. In a recent Bankrate survey, economists placed a65% chanceof a recession in 2023. Meanwhile, a mid-November American Association of Individual Investors survey showed nearlytwice as many investorspredict that the stock market will go down in the next six months than those who think it will rebound.
最新的经济之一atchers to sound the alarm is Bloomberg, whose forecast models show a100% chanceof a recession. All this is to say that it's nearly impossible to know exactly when a global recession will begin — or how long it will last.
But while past performance does not guarantee future results, historical data can help investors predict how certain assets might hold up in times of turmoil. As we head into the New Year, here's why you might want to consider real assets to help safeguardyour portfoliofrom the uncertainty ahead.
Related:7 Investment Strategies to Follow During a Crisis
Portfolio diversification
Historically speaking, stocks and bonds tend to have a negative correlation with each other, meaning if stocks take a turn, bonds should still hold their value and vice versa. Typically, the two act as a hedge against one another. That'snot necessarily the casein today's environment.
Following the Fed's decision to begin raising interest rates, coupled with growing fears of a potential recession, both stocks and bonds have experienced massive sell-offs this year. As a result, the values of both assets have dropped in tandem; year-to-date, the S&P 500 is downnearly 18%while the Bloomberg U.S. Aggregate Bond Index has surrendered about13%.
As two of the most common asset classes gear up to finish the year with net losses — which would be the first timesince 1969——传统的投资组合可能会痛苦的drawdown.
Across the board, investors are increasingly looking for non-correlated assets to help cushion their portfolios in times of volatility.
Real assets, such as real estate, infrastructure and farmland, have historically low or negative correlations to traditional stocks and bonds, as well as to each other, meaning they are not often exposed to speculative trading in public markets. In the last three decades, farmland, for example, has had a -0.06 correlation to stocks and -0.24 to bonds, according toresearchfrom my own firm, FarmTogether.
As a result, these assets can offer welcomediversificationfor investors looking to create distance between their portfolios and the markets.
Capital preservation
For nearly 30 years, real assets have provided similar or higher average annual returns than stocks, and with much lower volatility, resulting in historicallyhigher risk-adjusted returns. From 1991 to 2021, average annual real estate returns had a standard deviation of7.73%, while S&P 500's was over 16%. Meanwhile, farmland's standard deviation was just 6.75%.
This stability is largely driven by a host of factors, including real assets' intrinsic value, comparatively lower level of uncertainty around future cash flows and long-term structural trends driving values upward. The demand for necessities, like shelter, food and energy, for example, is inelastic, meaning it tends to remain consistent throughout the year. In turn, the value of these assets is not likely to experience swings like those seen with the markets.
During the 2008 Global Financial Crisis, the Dow Jonesdropped 54%. By comparison, gold values actually increased in valueby 4%. Today, despite stocks and bonds both showing negative returns this year, the NCREIF Real Estate and Farmland indices have returned around 9% and6%year to date, respectively.
In addition to their physical value, many real assets have the potential to deliverpassive incomethrough operating or rental income. Global real estate has historically generated an annual cash yield of 3.8%, while infrastructure investments haveyielded 3.3%. Farmland cash receipts from the sale of agricultural commodities are forecast to beup $91.7 billionin 2022, to $525 billion, a 21.2% increase from last year.
Related:How Entrepreneur Millionaires Prepare for a Recession
Hedge against inflation
While inflationcooled to 7.7%in October, the inflation rate is not projected to return to the Fed's 2% targetuntil the end of 2025, with some econometric models still showing3%+inflation through 2024. With many signs pointing to continued inflation, investors may find refuge in real assets.
The value of real assets is ultimately derived from their physical characteristics, meaning they're more likely toretain long-term valuethan other, more traditional investments.
But this unique quality of real assets is even more attractive when you combine the limited supply of natural resources with the rising demand from a growing population, which just topped8 billion peoplelast month. With stable supply-demand dynamics, real assets are well-positioned toincreasein value year after year.
Also, because real asset returns are inherently tied to commodity prices, which tend to move in lockstep with inflation, these investments have had a historicallypositive relationshipto inflation indices like the Consumer Price Index (CPI). Simply put, when the CPI rises, so too should the value of your investment; over the last 20 years, real assets have historicallyoutperformedtraditional investments in inflationary environments.
Preparing for a potential recession
In an increasingly uncertain market, real assets can present an attractive opportunity for investors in 2023 and beyond. By expanding into real assets, investors have the potential tohelp spreadoverall investment risk, generate historically attractive returns and help hedge against persistent inflation.
And thanks to the rise of real asset investment managers in recent years, investors now have access to a wide variety of investment channels and diverse opportunities.
