There’s a common belief in the investment world that a well-rounded portfolio includes stocks and bonds.
The standard “60/40” portfolio – in which 60% is allocated to stocks and 40% to stocks – is seen as the benchmark for a safe retirement portfolio.
The idea is that bonds offer safety, and stocks offer upside potential. And generally, they tend to have an inverse relationship. So while you won’t get much in the way of returns from bonds, the hedge they provide in volatile times makes them a valuable addition.
Here’s the thing, though…
It doesn’t always play out that way.
2022 was the first year in history when both stocks and bonds fell double-digits, about 18% each. And global investors lost around $30 trillion in a matter of months.
Thanks to a dangerous cocktail of rising interest rates, soaring inflation, and a declining stock market… The asset that was supposed to hedge your portfolio did as poorly as just about everything else.
But there’s good news…
There’s one little-known and even lesser-understood asset that rose almost 17%. And it wasn’t just last year. It’s historically outperformed stocks and bonds in all recent recessions.
This well-kept secret is backed by some of the smartest investors on Wall Street. But I wouldn’t be surprised if you’ve never heard of it.
At Intelligent Income Daily, it’s our goal to equip you with the best strategies to reach a safe retirement, regardless of what goes on with the market.
And today – with the possibility of inflation rising again and fears of a looming recession – I’ll tell you what that asset class is and give you the name of an investment that can help your portfolio survive market downturns… even when nothing else does.
We Haven’t Seen the Last of Inflation
First, I want to share what we might see in store for 2023…
Wall Street has been cheering the rapid decline in inflation over the last six months, with both stocks and bonds rallying strongly off their 2022 lows.
This rapid cooling is due to a few things… Pandemic supply chain disruptions being resolved, a massive energy spike from the Russian invasion of Ukraine normalizing, and now a tepid housing market.
Inflation was 8% in 2022 and is expected to be around 4% in 2023.
However, there’s a scenario in which it rises a lot higher this year… And this could trigger another terrible year for both stocks and bonds.
Early this year, China ended all restrictions surrounding its “Zero COVID” policy. This opening of borders by the most-populated country in the world will impact nearly every corner of the global economy.
For example, by the second quarter of this year, Chinese oil demand is expected to soar by around 1.5 million barrels per day.
Right now, oil supply is razor tight. Low oil prices caused oil companies to underinvest in new production for nearly a decade. Even when oil went to $130 after the invasion, oil companies focused on maximizing profits, not increasing production.
An extra 1.5 million barrels per day in demand in such a tight oil market could send the price of oil soaring. According to analysts from Goldman Sachs and investment bank UBS, crude could go from $80 to $140 per barrel by mid-2023.
For context, U.S. oil peaked at around $130 after the Russian invasion. That caused U.S. gas prices to hit $5 per gallon, the highest level on record in 2022.
And if crude goes triple digits again… UBS, Deutsche Bank, and Wells Fargo have a dire forecast that investors can’t ignore.
Inflation could start rising again in Q2.
The Fed might have to hike interest rates to 6% or even higher.
Long-term bond yields could rise 1% more.
Bonds could fall 7% to 28% more.
We may see a severe recession.
And stocks could fall around 30% from here.
If the China reopening scenario leads to another sharp energy spike, then 2023 could be another brutal year for most portfolios.
But don’t panic. Because there’s a highly effective and simple way to beat inflation and hedge your portfolio.
The Little-Known Asset That Can Protect Your Wealth
So what is this mysterious market-beating asset?
They’re called managed futures.
This is a strategy in which investment managers go long (make bullish bets on) or short (make bearish bets on) stocks, bonds, commodities, and currencies. They use options to access natural leverage and create a kind of hedge fund designed to shine when stocks crash.
These are usually trend-following models driven by an army of quantitative analysts, machine algorithms, and supercomputers. In other words, Wall Street’s highest-paid, brightest minds working for big institutions and rich families.
Here’s the important part: In 2022, managed futures were one of the best-performing strategies, rising 17% to 36%, depending on which funds you used.
Managed Futures During Bear Markets
(Sources: Barclays, Soc Gen, DBMF, Charlie Bilello, Ycharts)
During the average bear market since 1980, managed futures averaged a 37% gain… while the stock market fell 23%.
Can you see why the rich love managed futures? It’s one of the best-kept secrets on Wall Street. I personally use this strategy in my family hedge fund, where I have my entire life savings.
Today, this secret weapon is one I make a core part of our investment strategy at Fortress Portfolio, our brand-new investment newsletter. Our goal is to create an income-producing, buy-and-hold forever portfolio of the world’s safest blue-chips.
Now, I can’t give you the specific funds we recommend, since those are exclusive to paying members (non-subscribers can click here to find out more about it)… But let me leave you with the name of one low-cost managed futures fund that could save you in 2023.
The GuidePath Managed Futures Strategy ETF (GIFMX) is a five-star Morningstar-rated managed futures fund, with a 1.2% expense ratio. That’s compared to 5% the average hedge fund charges its clients for this strategy.
Since its 2016 inception, it’s been in the top 5% of its peers. And its average annual returns have been 7.2%. That’s double the return of bonds, and all paid out as annual dividends.
In 2022, GIFMX was up 37.4%, while stocks, bonds, and a 60/40 fell 17% to 18%.
So if inflation strikes back with a vengeance in 2023, this is a great option to park some funds and safeguard your overall portfolio.
Managed futures are a wonderful “buy and hold forever” asset class. Combined with stocks and bonds, they are the best way I’ve ever found to great yield, great returns, and low volatility. And if you’d like to learn more about them, click here to get more details on Fortress Portfolio.
Analyst, Intelligent Income Daily