On Tuesday, I called the multi-generational breakout in interest rates a trend changer…

And a regime shift that is exposing just how unprepared the global financial system is.

That’s because a weak stock market – coupled with rising rates – clashes with the traditional 60/40 portfolio.

It’s a trillion-dollar, cookie cutter model that’s used by most traditional money managers.

As I suspected, many of you are worried about this outdated model…

Richard, a member of Jeff Clark Trader, wrote:

I have a traditional 60/40 equities to bonds split in my portfolio, through a traditional broker. I would like to move all bonds over to gold and silver… Those bonds killed me during this first quarter. I am, after a little more study of your materials, going to trade options.

– Richard S.

Thanks for sharing, Richard.

His thought process is correct. Adding gold to stocks and having an active trading component to your portfolio is exactly what’s needed.

But first, it’s important to understand why money managers have fallen in love with pairing stocks and bonds.

Historical data pushes the belief that stocks and bonds always rise in an inverse manner.

Meaning, when one rises the other tends to fall. But overall, both rise together.

This expectation is what everyone’s after. It’s the holy grail of investment management.

Investors believe that if you pair enough uncorrelated products together with a positive return expectancy – you can smooth out your returns over time.

Under this belief, bonds would perform well when the market turns weak. But this old investment model doesn’t apply to today’s economy.

When regimes shift, as they are now, historical data becomes a mere mirage.

Right now, both stocks and bonds are falling in unison.

But gold is not.

It’s continuing to display its true value, as one of the best, time-tested products that rise in a truly inverse way with the stock market.

I’ve always wondered why firms like BlackRock or JPMorgan Chase never encouraged a 5%-10% allocation in gold. Instead, they came up with cockamamie products like “smart beta” exchange-traded funds (ETF), to combat market drawdowns and help portfolios.

But these ETFs never rise when investors need them most. They fall in unison.

They do this because the more products these firms create, the more fees they collect by implementing them into portfolios.

Gold does the job, but it doesn’t add to their bottom line – even though it’s the perfect long-term addition to your portfolio.

Free Trading Resources

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Which brings me to Richard’s second part of his question – the active trading component.

BlackRock recently came out with a thought piece titled “Rebalancing the Lopsided 60/40 Portfolio.”

Based on the title, I thought for sure they would include something about gold.

I was wrong.

To Richard’s credit, they acknowledged that passive portfolio management is probably dead for now… And that active trading is where it’s at by introducing something called long/short investing (combining a long portfolio with short positions).

The problem is that it relies on their ability to pick stock losers and winners at the same time.

And at some point, the bull market will return. And when it does, this strategy will become subpar.

Hedge funds and professional traders do this well… not passive money managers.

My other thought is always, “Where were you when the market was at its peak?”

Firms like this are the same ones that cheerlead an obviously overvalued market and change their tune when its advantageous to do so.

With an active trading service like ours, we call ‘em like we see ‘em.

Which is why as the market was at all-time highs, we came out with several pieces calling for a swift about-face in stock prices, specifically tech.

Jeff Clark talks about it here, and I also mention it here.

Hopefully this helps Richard and the rest of our readers.

Regards,

Eric Shamilov
Analyst, Market Minute

Reader Mailbag

How will you be restructuring your portfolio in this bear market?

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