I’ve written recently on the declining correlations among individual stocks. This can make stock picking a lucrative venture, if you know how to separate the wheat from the chaff. Of course, you also have to be nimble enough to hit the eject button and pull your chute as the Fed’s market-propping efforts begin to fail.
Once the equity gig is up, whenever that day comes, investors will have to look to other asset classes – commodities, currencies and bonds – for profit opportunities. And we must look on both the long and short side of these markets.
One simple strategy involves gaining exposure to four key asset classes:
1) U.S. Treasury Bonds
2) U.S. Dollar
4) S&P 500
By moving in and out of each asset class – sometimes going long, sometimes selling short – an investor can stay diversified and capture gains that can’t easily be had in the equity markets alone.
Here’s a look at how this approach fared over the past 10 years (in blue), compared to the S&P 500 (in red)… which has gone mostly sideways for a decade.
As you can see, investing $100,000 in the S&P 500 10 years ago would have helped you earn about $25,000.
But by following the ebbs and flows of the four major asset classes, you could have done much better. The long/short strategy generated over $250,000 in profits over the same period. And, the diversification gained by investing in multiple asset classes made the ride a lot less bumpy.
That’s how you create a win-win situation in this difficult market environment.
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