With three key safe havens doing well – the dollar, gold and long-dated U.S treasuries – is it possible that investors have been questioning the lofty valuations of record-breaking U.S. stocks? Perhaps the risks to the aging bull have risen substantially and perhaps investors prefer hedging stock volatility differently than in the past. After all, buying volatility has been an exercise in futility for all but the high frequency trader, while shorting stocks has been equally unkind. Note: See ProShares Short S&P 500 (SH) in the chart below.
With U.S. stocks holding onto impressive long-term technical uptrends, I remain committed to owning the large-cap proxies that have served me well for quite some time. They include iShares USA Minimum Volatility (USMV), iShares S&P 100 (OEF), Vanguard High Dividend Yield (VYM) as well as SPDR Select Sector Health Care (XLV).
At the same time, I have benefited handsomely in 2014 by implementing a multi-asset approach to stock hedging. I employed many of the components of the FTSE Multi-Asset Stock Hedge Index – a benchmark that my colleague and I created for Pacific Park Financial, Inc. – to effectively incorporate non-stock assets with a history of non-correlation. Foreign sovereign bonds as well as foreign currencies can be added to gold, U.S sovereign debt, U.S. muni debt, and the greenback in the pursuit of principal preservation as well as modest total return. Indeed, the FTSE Multi-Asset Stock Hedge Index is up 4.9% in 2014.
If you are not investing directly in the index, it is sensible to equal-weight several of the key components. Consider CurrencyShares Yen Trust (FXY) for the potential that the yen carry trade could unwind. Ease into intermediate-to-long treasury bonds via iShares 10-20 Year Treasury (TLH). And don’t be afraid to acquire inflation-protected securities at a time of global deflation, as iShares TIPs Bond Fund (TIP) boasts a technical uptrend as well as non-correlation to U.S. equities.
