The nature of risk shifted in 2014. Large-cap U.S. stocks in the S&P 500 still rocketed mightily. Yet the clear preference of stocks over safer holdings evaporated; treasuries rallied throughout the year, in spite of the near-unanimous sentiment that interest rates would fall. (Note: I am not opposed to tooting my own horn on this one – I recommended pairing large-cap stock ETFs with long duration treasury ETFs like Vanguard Extended Duration (EDV) and PIMCO 25+Year Zero Coupon (ZROZ) 13 months earlier.)
Safer haven assets were every bit as desirable as the Dow and the S&P 500 in 2014. Some of them like TLT and ZROZ were more desirable. At least for a calendar round-trip, the ownership of historically divergent asset classes produced harmony and indivisibility. Is that uncommon for a late-stage bull market? Not particularly.
On the other hand, the landscape may be changing. The perceived need for safety has risen appreciably since the Federal Reserve ended its electronic money printing in October. For example, in 2015, each of the 10 components of the FTSE Custom Multi-Asset Stock Hedge Index has gained ground, whereas the S&P 500 has drifted lower. Those component assets include long-maturity treasuries, zero-coupon bonds, munis, inflation-protected securities, German bunds, Japanese government bonds, gold, the Swiss franc, the yen and the dollar.
Granted, the European Central Bank (ECB) intention to create $50 billion euros monthly for a year could reward risk-taking in the same manner that the Federal Reserve’s $85 billion per month had. On the flip side, the $600 billion euro figure that is floating on newswires may come off as underwhelming, as the Fed’s QE3 had been open-ended upon its announcement. Moreover, the “stimulus” amount ran beyond the trillion-and-a-half level.
Keep in mind, you do not need to run from stock risk if you have a plan to minimize the severe capital depreciation associated with bear markets. My approach in latter stage bull markets involves pairing lower volatility stock ETFs like iShares USA Minimum Volatility (USMV) and iShares S&P 100 (OEF) with safer haven ETFs like Vanguard Long-Term Bond (BLV) and Vanguard Extended Duration (EDV). If popular stock benchmarks breach 200-day trendlines, I reduce equity exposure and/or employ multi-asset stock hedging by investing in those assets with a history of performing well in moderate-to-severe stock downturns.