Investors are facing one of the toughest markets in history right now. And that’s true even if we’re not technically in “bear market” territory.
That’s because two of the most important areas of the market have been trading lower.
Stocks get all of the media attention as the financial news networks track the Dow Jones Industrial Average, the S&P 500 Index and the Nasdaq Composite.
Those markets have experienced one of the worst starts to a year in recent history.
Our other important market for investors is the bond market. And what you may not have seen on the financial news networks is the absolute carnage in the bond market this year.
As inflation soars and interest rates rise, bond prices have moved sharply lower. And that’s a disturbing problem for millions of investors counting on these bonds to help pay for their retirement.
Historically, financial planners have steered clients toward a “barbell” approach… Investing a portion of capital in “risky” positions, and another major investment in “safe” bonds.
Traditionally, when stocks have been weak, bonds have held their value. So the barbell approach helped to stabilize investors’ wealth.
But lately, the diversification hasn’t helped at all. And with both bonds and stocks falling sharply, investors are getting hit on both sides.
This pullback in both the bond and stock markets is causing major damage for too many investors. The traditional “barbell approach” just isn’t working.
Which is why I think it’s time to consider a new barbell approach — using a different type of diversification with your investments.
Balancing Two Approaches In Today’s Market
Over the past couple of years I’ve been using a different sort of barbell approach with my family’s money.
I’ve split our investment capital into two different categories: One quite conservative, and one that takes a much more aggressive approach.
On the conservative side, I’ve been selling cash-secured put contracts to generate income from some of my favorite stocks. You can read more about how this strategy works in my 5-part educational series found here.
The other side of my barbell approach takes speculative positions on stocks I expect to trade sharply higher (or lower). I use in-the-money call contracts for bullish bets, and in-the-money put contracts for bearish bets.
This approach certainly involves more risk than I would want to take with the majority of my investment capital. But allocating a smaller portion to this more speculative approach gives me a chance to make profits from different market scenarios.
By diversifying my approach between these two models, I keep a portion of my investment capital safe (with less volatility). At the same time, I’ve still got a chance to profit from the different trade opportunities that are showing up in today’s more turbulent market.
Ditch the Traditional “Barbell” Portfolio
Traditional “barbell” portfolios — spread between stocks and bonds — just don’t work in today’s market.
Now that the 40-year bull market for bonds is over, these “safe” assets just don’t provide the protection they used to for investors.
Even treasury bonds which are guaranteed by the full faith and credit of the United States still carry a lot of risk.
While you’ll certainly get your money back from these investments, the current price for bonds sink as interest rates rise. And since inflation is very high, your eventual payoff will be worth far less when you eventually collect from Uncle Sam.
I prefer to divide my capital between active trading ideas and more conservative investment strategies. That way I can potentially profit from falling stocks as well as rising stocks. And I can also protect part of my capital with more conservative income-generating investment strategies.
That way my conservative investments generate cash that can eventually be invested in new positions (possibly buying at much lower prices). And my aggressive investments don’t necessarily need a bull market to succeed.
It’s a different type of diversification from what Wall Street has traditionally used. But as our financial markets shift from the “traditional” bull market in bonds to a more hostile environment for savers, new investment approaches can help you adapt.
Stay tuned for new trading and investment ideas to use with each of these approaches!
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