💡 Does Your Portfolio Need Bonds?

Join Lori Zager and Lisa James as they explore the evolving landscape of bonds and their role in modern investment strategies. In this engaging episode, they discuss the historical significance of bonds in portfolio management and explore why traditional approaches might be shifting.

Discover the factors influencing the effectiveness of bonds as a hedge against market volatility and gain insights into alternative investment strategies that could complement or replace bonds in your portfolio. From gold and energy to the potential risks of treasuries, Lori and Lisa offer a balanced perspective on the current investment climate.

Tune in to learn about the various types of bonds and their potential roles in different investment scenarios, and hear real-world examples that illustrate the complexities of modern portfolio management. Whether you're a seasoned investor or just starting, this episode provides a thought-provoking discussion on the future of bonds and their impact on your financial journey! 📈💰

Find out more and reach out to us on our blog.

Transcript

Lori: [00:00:00] Welcome to the Nest Egg Podcast. I'm Lori Zager. I'm here with my partner, Lisa James. We are two X Wealth Group, a team at Ingles and Snyder, which is an independent registered investment advisor. And the subject of our podcast today is, does your portfolio need bonds? 

Lisa: Traditionally, the answer to that question of whether your portfolio needs bonds is yes, because if you look in the past for decades, a 60 40 portfolio, which is 60% equities and 40% bonds, has performed almost as well as a 90 to 95% equity portfolio and has had a lot less.

Volatility and that has made investors a lot more comfortable and allowed them to have wonderful returns, but times change and bonds may not provide the security they used to. 

Lori: So it really depends on what stage of life you're in. Although I would [00:01:00] argue that as a population lives longer that you know how much or what percentage of bonds you have in your portfolio has changed.

But also what do you need in terms of. Are you retired? We all know I'm never retiring. Do you need income to live off of or do you have a, a fairy godmother? 

Lisa: Yeah. Or are you very young and you're just at the beginning of your savings, uh, you know, career. So age is a very big component of how many equities should be in your portfolio and return.

Yeah. And the younger you are, the more equity you should have. So this, this, uh, discussion is not really for 20 somethings or even particularly 30 somethings. It's more for people that are, uh, a little bit older, have families or. Maybe possibly a little more risk averse or retiring and are concerned about their income and making money last.

Lori: Well, part of the, it's part of the sandwich generation that are, you know, having to take care of parents and at the same time also take care of [00:02:00] of children and so may need some income. 

Lisa: Right. So we kind of, um, will circle back to the question of why, why would you have bonds in your portfolio? What, what is the reason.

For a bond. And, um, there are a couple, traditionally it was used as, uh, what we'd call a hedge to equity. So a hedge would be something that would behave in a stable manner or maybe even go up when the equity market goes down. So you want something that's going to protect your portfolio when equities do badly and for a very long period of time.

Since the 1980s, bonds have done a pretty good job of that. Part of the reason for it was that interest rates were very high in the high teens, even in the 1980s, and they went through a very long period of falling in yield, which has always beneficial to bonds, to bond prices and bond parlance. When yields go down, prices go up, and that has been a a wonderful [00:03:00] time period for anybody who add bonds in their portfolio.

Lori: Lisa, why don't you explain, you've explained it before, but. I have a friend who is a physician who said he never understood the relationship between bond yields and bond prices till he heard you explain it on one of our early podcast. Oh, lovely. I love that. So I figured if he was smart enough to get through medical school and he didn't understand it, there are many people that don't understand it, and you are great at explaining it.

So please. 

Lisa: Well, I think the easiest way to look at it is, um, this would be a great example for 2022 when, uh, interest rates were very low. The Federal Reserve had cut rates in order to stimulate the economy around the pandemic. So interest rates, um, went down to 1%. So just think, okay, you bought a, a bond that yielded 1% at the end of 2021, and at the end of 2022, you could buy bonds that yielded 4%.

So you have to ask yourself, what [00:04:00] would you pay for that bond that yields 1% when you can get 4% today? Well, you would pay a lower price because you have to be compensated for the fact that you're getting a much lower payment of 1% of your investment. So 

Lori: the new bonds that are coming out are coming out at 4%, and if you want to sell your 1% bond to somebody, nobody's gonna buy that 1% bond for what you pay at par for what you paid for it.

When they can go out and buy it from somebody else, buy another bond from somebody else that. That gives 'em 4%. Right. So your bond has got to go down in price enough to compensate people so that the yield is equivalent to what a new bond would would buy you. Exactly. 

Lisa: So that happened in 2022 when the Fed raised interest rates and inflation went to 9%.

People were very unhappy with low yielding bonds. Bond yields had to go up for them to be interested in purchasing bonds, and it was a big sweeping change in the market and [00:05:00] actually, uh, sort of a general bond. ETF went down about 16% that year, and that was a big change. 

Lori: So that's a problem if you're buying bonds to hedge your portfolio.

Or not behave the same way as your equities do, and they behave the same way as your equities do. You've got a problem. They're both going. Yeah, they're not a good, they're not a good hedge. No. So what we tried to talk about in the blog that accompanies this podcast is. When do bonds not help you? And what are some things that you can do to hedge your portfolio if bonds don't help you?

Lisa: All right, so before we get into what are, uh, some alternative ideas, uh, of things to own rather than bonds in your portfolio, why don't we just give people a little primer on the kind of bonds that you own and what can actually help. Potentially protect [00:06:00] your e equity portfolio and what doesn't really?

So, um, first of all, the people who benefit most from owning bonds are really retirees, you know, because they're trying to live off their portfolio and they often don't wanna have to look at their portfolio, go down, you know, 35% in a bad year. They wanna have. A certain amount of the portfolio and things that just provide them with income that they can live in, live on.

And, and that's one of the things that that bonds can do in a portfolio is give you the income that you wanna live on. And you know, it's very interesting because when bonds are around four or 5% in yield, that's pretty much the safe withdrawal rate. From a portfolio that, you know, Morningstar analyzes, 

Lori: explain what's safe with drawing is Lisa.

Lisa: Yeah, so, so if you are going to try and, uh, live off your portfolio and you don't have other income, you basically, uh, can do an analysis that says. If I am living until [00:07:00] 95, which is normally the age that we use, how much of my portfolio can I withdraw every year and be able to, uh, spend without running out of money?

And, and that spending is inflation adjusted in any model that somebody runs to figure it out. So when your bonds are at the rate, that is the same as your safe withdrawal rate, that's pretty nice. So just to go back historically. 

Lori: 4% is kind of a ballpark figure that people use for a safe withdrawal rate.

So if you take out 4% of your portfolio every year, your 

Lisa: portfolio is sort of gonna last almost indefinitely. Right? That's the, I mean, we run this for people that aren't, you know, expected to die for 30 or 40 years. So it really does. Allow your partner or never. With our new client, his 90th 

Lori: birthday, we're going to, he's never dying, 

Lisa: right?

So right now bonds are kind of right in the area where, uh, they're perfect for retirees, but they're not always there. [00:08:00] And actually the safe withdrawal rate is often very related to how much bond yields, because when bonds were yielding, one or 2% safe withdrawal rates went down. To 3.5% Becausecause, you couldn't get enough income out of your bonds to live off, so your withdrawal rate had to be lower, right?

Um, 

Lori: you had to withdraw less If few bonds weren't providing income for you, kind 

Lisa: of four or 5% is a bit of a sweet spot. Average bond yields have been around 5% over long periods of time and tend to work for people there. So that's kind of the retiree picture. For people that are accumulating wealth, you know, as we said, twenties and thirties, you should really mostly be inequities.

But in your forties and fifties, you can still be accumulating wealth, but you might want to have a less volatile portfolio, or you might have reasons that you need some income from bonds. Those people mostly. We'll be using bonds as a hedge against their equity portfolio. 

Lori: And the worst thing you can do is need the [00:09:00] money and have it invested and need to take it out at a time when the equity market is down, 

Lisa: right?

And that's called, that's called sequence of return risk. So we, because you basically sell your equities and you don't give them a chance to recover, and now your equity portfolio is just smaller. So an example of how selling at a loss can hurt you is if you had a thousand shares of apple. Stock and Apple stock went down 20%.

And so your a thousand shares say was worth just to keep it simple. A thousand dollars, you would still have a thousand shares and if they went back up, you would have the same amount of money you had before, but if instead you had to sell $20,000 worth, you don't have a thousand shares anymore. You know, you only have 980 shares and those shares.

Even if they go back up to the original price won't be worth as much 'cause you sold some of them. At the lower price. 

Lori: That's, that's an easier, that's a better way of explaining it. And 

Lisa: so, and so, that's just a really simple [00:10:00] example, but you know, those numbers can be a lot more dramatic than that because the market from time to time does go down 40 to 50%.

So if you're selling, then you're really impairing your ability to recover. So we never want people to have equities for money that they need in the next. Couple of years for a big purchase, like a house, or they think they might lose their 

Lori: job or even even to 

Lisa: live 

Lori: on, right? They need, they need a couple years worth of income to live on.

So you 

Lisa: have to decide what are you gonna do with that money? Are you gonna put it in cash? Are you gonna put it in bonds? Are you gonna put it in something else? So, and if you're gonna put it in bonds and you want it for safety. Most people will choose to put it in treasuries and short treasuries and very high quality bonds.

Short and high 

Lori: quality and very short term because the longer, in most circumstances I should say the, the longer the duration of the bond, which 

Lisa: is it's mature, basically it's maturity. Are you, do you own something that's two years to maturity or 10 years to maturity? 

Lori: Most of the time people require [00:11:00] a higher interest rate.

The longer the bond takes for the bond to mature, I mean, because who knows what's gonna happen. We don't even know what's gonna happen in the next day with the way things are going right these days. So, 

Lisa: so, yeah. So if, if you need money to live on it, you usually keep it pretty short. If you want income, you generally have.

Bonds that are a little bit longer, that are gonna give you a little bit more yield as long as you're not, uh, fearful of a, a big inflationary spike. Uh, if you want to be safe, you buy treasuries, you buy money market funds, those are the safest things to own as an alternative to equities. Historically, there are other bonds that really don't help you with protecting your portfolio, which would be.

Junk bonds, which are lower rated companies that have basically worse business prospects that have more of a possibility of going out of business. And those kinds of companies, bonds tend to be very correlated to the equity market because if the economy is [00:12:00] slowing down and the equity markets going down, junk bonds go down with it.

So it's good for income, but it is not good as a portfolio Hedge. And then there's some other bond funds that are very, very popular. They're called Core or Core plus bond funds, and that has a mix of treasuries and corporate bonds. Core Plus might throw in a few junk bonds in there, and those are good for income and they're, you know, reasonable as a hedge, but they're never gonna be as good as a hedge as either treasuries or cash.

People ask us about, um, municipal bonds, and that's a little bit of a specialized market. Most of those bonds are pretty long term, and people mostly buy them because they have tax saving purposes. Um, so if you're in a very, they really work for people in the very highest tax bracket. So. 37% federal tax bracket and you know, you save money there because you don't get taxable income out of a municipal bond.

And they generally will be more [00:13:00] attractive after tax for these high income earners than a corporate bond would be. But they're not really a great hedge. They're not, um, they're not as bad as junk bonds, but they don't do what you want in a down market, typically. So we don't tell people to buy those, to 

Lori: protect their equity.

Well, part of the problem is the municipality can come into question whether or not it can pay. 

Lisa: Yes. And that can happen in about economy. And that's very state by state, you know, like or project by project. Yeah. I mean, obviously Illinois is in a really different position than California. In California probably since Good as Florida.

So anyway, we've talked about this and it's a little bit more, um, historical in terms of how people look at treasury bonds protecting them. And we do have concerns about this currently. So I'll let Lori take that away because I'm gonna get on my soapbox right now. Yeah. Why we worry about treasuries actually protecting you.

I'm gonna get, 

Lori: I'm gonna get on my soapbox and it, it was funny when we were writing the blog, [00:14:00] you know, Israel was. Bombing Iran. And um, you know, usually when something like that happens, people would flock to US treasuries because they're seen as, as a safe haven. And so if they would flock to them, the price of them should go up and the yield should go down, but.

That didn't happen. People didn't come to treasuries. And so you had a, a clue that maybe people weren't thinking that US treasuries were the safe haven that they have been in the past. So why is that? And you, you've had another couple of of signs that people are a little bit worried about, uh, US Bonds people, other countries are trying to do business in other currencies and are.

Quietly selling US treasuries. China has been doing it. Japan and the UK have been selling treasuries. Um, they've been buying gold actually instead. The problem [00:15:00] is that our debt is so high and, and 

Lisa: growing. 

Lori: It is growing. The debt held by the public is 99% of GDP and growing, and there's a really interesting video that you can get the link to from the Wall Street Journal when they talk about when does our debt become really scary?

The point that they make is if debt to GDP becomes high enough, you can't tax your way out of it. You've got a real problem. So it's definitely worth seeing. Uh, that was sparked by my dearest friend in life who is incensed by all the billionaires not paying taxes. And uh, I assured her that it doesn't matter if they took all their wealth, they can't tax their way out of it.

It's too big of a problem. 

Lisa: But if you wanna find that video, you should go to our website. Two x wealth.ingles.net and you can find a link to the video in this blog, 

Lori: which is called Does Your Portfolio Need Bonds? [00:16:00] And the other thing that, um, I would say is that, um, you've got some foreign bonds that are offering an attractive alternative to US treasuries, not.

Necessarily for US investors, but maybe for other countries investors. Uh, because our dollar has been going down, it's mainly our debt and our growing need to finance that debt that has us upset about Yeah. The bond market. I mean, this 

Lisa: is almost a, this is really sort of a classic supply and demand economics problem when the supply of something.

Goes up, it gets cheaper. And when treasury bonds get cheaper, it means their yields go up. You know, because you have to offer something better in order to get incremental buyers when there's a bigger supply. And 

Lori: you 

Lisa: know, we could ask the question, 

Lori: well, what do we do? This video that I mentioned, it talks about the sources of our debt and they are.

Programs, mostly [00:17:00] entitlement programs that nobody in Congress is going to get elected or reelected if they cut, wants to cut 

Lisa: Social Security and Medicare or Medicare, Medicaid. I mean, they're trying even cutting Medicaid. They, I mean, they did do it, but. You know, there was a lot of, you know, complaining and fighting back against cutting Medicaid.

Lori: Yeah. And Medicare and social security are big problems. And 

Lisa: everybody has 

Lori: them, and everybody wants them, and nobody wants them to be taken away. Right. And nobody, no Congressman Senator is gonna say. Oh, I'm, it is gonna get elected by, you know, the way they get elected is by kicking the can down the road and thinking it's someone else's problem.

And they still 

Lisa: have about, you know, eight years. So, 

Lori: yeah. So, so what happens, and I, the only other thing that I will point you to is that we once wrote about this. There is a. Precedent for a problem like this, and it was after World War ii. And what the government did is they basically put yield curve controls on.

Yeah, but they have a 

Lisa: different idea now. I mean, the [00:18:00] Treasury Department has talked about having the stable coin. No, no, no. They have, well, the stable coin is one thing, but they've talked about doing something that they never did before, which is that the, rather than just having the Federal Reserve. Buy bonds in times of market stress.

They're talking about the treasury, the US Treasury, buying bonds to reduce the supply in the market and instead issue more short-term treasury bills that are like one to three months and they're use for these treasury bills will be stable coins. Which will be a digital currency, currency backed by treasuries.

So like there are, there are plans afoot in terms of having the government have ways of dealing with this, what I would consider oversupply of treasuries. 

Lori: Yeah. Oversupply of treasury because we're out, we're spending beyond our means. Yeah. And, 

Lisa: and because, because interest rates are reasonably high, and this is one of the reasons that Trump is screaming about having the Fed cut rates.

High interest [00:19:00] rates means that we have a high cost of interest on the debt and the US Treasury has to pay for it. That is part of the budget. What we have to pay interest on the treasuries that we've issued, so the lower interest rates go the lower that. Interest rate burden becomes, and part of the reason it was really fine for like over a decade to have high debt is that interest rates were really low.

We had short term interest rates, you know, from zero to 2%. Well, that's not true anymore. There, there were four or four point a quarter, so it wasn't problematic 

Lori: at that point yet. But it's getting But but 

Lisa: the cost of it was half Absolutely. Or a quarter of what it's now. Absolutely. 

Lori: Even for the same amount of debt.

So, so what? President Trump isn't telling you. I don't think he's giving you, I mean, he's. Throwing screaming tantrums. I mean, you know, trying to get rid of j Powell and screaming that we need lower rates. Well, if he quit with his tariff tantrums, he might get lower rates. And [00:20:00] now that the rumor is, I, I heard this today, Lisa, that he evidently had a memo ready to go to fire.

Oh yeah. Somehow and that, but he hadn't. Done it when interviewed, he said, no, no, no, I wasn't gonna do it. Uh, the 

Lisa: pun, they're just floating things out to see how much the market goes down. Every time he talks about firing Powell. 'cause the market doesn't like that idea. But the 

Lori: one pundit, one pundit said, and I totally agree with this, okay, there's no way in hell they're gonna lower rates in July.

Powell is gonna say, Uhuh not doing it. I mean it's like, it's like two boys fighting with each other. Yeah. But I think, I 

Lisa: think PAL is actually not fighting. I think he just. Wants to wait and see, but he's made that mistake before and he waited a little bit too long to see that inflation happened. So, you know, people are, uh, you know, people have that knives out for him at this point, you know, in terms of not having him 

Lori: make another mistake.

So we sense that bonds may not help you this time, and there are times that bonds, and we, we talked about it, the bonds and stocks can move the [00:21:00] same way as they did in 2022, and that was a higher inflation environment. Mm-hmm. And. I think anybody that knows me thinks that that's gonna happen and um, it's a matter of time.

And I would argue, although some disagree with me, that tariffs are inflationary. 

Lisa: They are, I think we just have questions about how inflationary 

Lori: they'll be and whether or not it's a one time. Step up inflation. I argue that it's not, because I think what happens is that inflation expectations start to go into the psyche of the, the public.

You're already seeing it and inflation has come down, but you're already seeing people act. Because prices are higher, which is, 

Lisa: yeah, a lot of people just, you know, don't really understand the difference between higher prices and higher inflation. So, you know, if prices went up 20%, they're not going down, you know, so prices will remain high, even if, if inflation falls, you know, inflation has fallen basically from [00:22:00] nine to 2.5%, but you know, it's still two point a 5%.

Of the new higher price, their prices still feel very high and people are unhappy about that, and we still have inflation. It's just, it's not as, it's not crazy. It's not growing as fast as crazy. It was in the past. And inflationary expectations also are still at 2.5%. But I think there are a lot of people that are concerned about tariffs and their impact on inflation, and it's kind of hard to know what's gonna happen because right now companies are just sort of, I just read an article that, uh, companies are basically mostly eating, um, uh, the difference in their input price and their sale price.

They're not raising prices 'cause they don't wanna tick off their consumers. Some people, you know, gathered a lot of inventory and anticipation of the tariffs. So they're working off older, cheaper inventory and not raising prices. So the rubber's not gonna meet the road. In terms of what we really know, I think probably for a couple months, but then we might see it because, you [00:23:00] know, once they run through their inventory, uh, that they bought at cheaper prices, at some point they might say, you know, we really need to raise the price, right, because we have to pay more ourselves.

Right? So the question 

Lori: is, who's gonna pay? Uh, president Trump seems to think the people that are making the goods are going to. 

Lisa: Yeah. But so far the information is that the cost of tariffs is about 20% is attributed to the people who export to us, and the other 80% comes from US companies and US consumers.

So this is not something where somebody else is paying. 

Lori: No, we 

Lisa: are paying. 

Lori: We are paying. So, but it's a question of who pays, whether it's the company that's gonna eat it or the consumer senate. Do it. And then what happens when the consumer, when prices gets you high, that creates downward pressure On On demand.

Yeah. Yeah. And then you've got a slower economy. Slower economy, which, so then people start worrying about recession. But in higher inflation environments, bonds do become correlated to stocks. They both go down as they did in 2022. And [00:24:00] so bonds won't help. What do you do? 

Lisa: What do you do in those circumstances?

And there's actually been some decent, uh, research on this topic. And it's also, this is a pretty prevalent conversation these days because a lot of people are more concerned about what's happening in the treasury market and are looking for other alternatives to hedge portfolios. And there's, you know, one hedge that we've liked for a very long time, which is gold.

And Lori, why don't you talk about how gold protects you. Generally, and also in the current environment. 

Lori: Well, it's historically protected you because the thought is that there's only so much gold in the world. I mean, that's where Bitcoin probably got its idea. And so unlike. Our country, which just can issue more dollars, you know, whenever they want to.

There's only so much gold in the world. And so, so gold is 

Lisa: a, that means that gold is a good store of value [00:25:00] because the supply itself is not, it is limited, terribly elastic. It tends to be actually fairly similar to the inflation. 

Lori: Yeah, so it's, it's the growth 

Lisa: in the supply of gold. It's, 

Lori: we recommend that you ho hold both gold and gold equities because there has been a precedent for the US government not allowing citizens to own gold and.

That was Franklin Roosevelt that did it. And so if they come and take our gold, the question is what happens then to the The gold miners? The gold miners, and what happens is they tend to go up in price because people are trying to figure out how to get gold. And they're gonna get gold out of the ground.

Hawaii Gold also 

Lisa: is, um, a portfolio diversifier in times of geopolitical strife. And this is something that we've, uh, talked about before because you don't really, you don't have to rely on a country or a currency. Gold is something that's [00:26:00]international, that's owned. Basically by all the, um, the central banks of developed countries and even lesser developed countries.

So, uh, there's really a pretty big market of institutions who hold gold as 

Lori: well as individuals and countries that own gold. Right. And the US being the biggest. Yes. The whole theory behind Bitcoin was really because of gold. And the problem that I've had with Bitcoin is the. There's no there, there, and people will say, well, there's no there there with gold either.

The problem that I have is I can't figure out an intrinsic value. What's it worth today versus tomorrow? Yeah. Gold's intrinsic value is really a lot 

Lisa: less than what it's trading at today. Yes, but, but it does have one. I mean, people like gold for jewelry. It can be used in some industrial applications.

Small, but, you know, uh, 

Lori: silver's much better that way actually, in terms of, so gold, gold has an intrinsic value, but it's well below 

Lisa: its current price. So that's the problem. 

Lori: But [00:27:00] it's something, 

Lisa: it's not zero. 

Lori: Yeah. And I guess the only thing that I could I, um, have someone who is. Explain to me that the one advantage of Bitcoin is that it can be transferred very easily versus gold.

If you have a gold coin, you've gotta, it's much easier. It's physically 

Lisa: very heavy. 

Lori: Well, 

Lisa: you 

Lori: have enough, often it's, but, uh, bar certainly is, but it's much easier. And so it's been used for all sorts of illicit purposes, but Yeah. But, but it also can 

Lisa: be used by somebody that wants. To be able to get their money out of their country where, you know, they can't actually trade for other currencies.

And 

Lori: I heard something. And not because 

Lisa: they're doing something illegal, but just because they prefer to have their their money elsewhere. 

Lori: It might be illegal also. It could be. It could be. But the other thing that I heard the other day, and I. I, I don't remember the exact percentage, but something like 60 to 80% of Donald Trump's wealth is in Bitcoin.

So, um, well, and he started his 

Lisa: own cryptocurrency, so he made some money on that. 

Lori: Yeah. But this, yeah, but this was [00:28:00] actually Bitcoin. Bitcoin, which I thought was really interesting given that he 

Lisa: wants 

Lori: the US 

Lisa: to own it. Yeah. 

Lori: And then I had someone say to me, well, I don't think he has any money. How many times has he gone bankrupt?

So I don't know what the denominator is in terms of, yeah. So anyway, 

Lisa: he seems to be doing pretty well. Right now. It's, 

Lori: it's a little bit of a stretch, but. Certainly young people, younger people have, are more comfortable with Bitcoin than, uh, certainly Charlie Munger was when he was alive. And he didn't like gold either though.

No, he didn't like gold. Yeah. Um, and neither does Buffett, as a matter of fact, so, yeah. I, I do get the argument, it's a little bit harder for me when it's, uh, a digit in an account. One could argue that it has some of similar benefits to, yeah. It's a store of value, store of value. Mm-hmm. And, uh, and a hedge against, uh, it's a, 

Lisa: it's a somewhat uncorrelated, but you know, we find actually that Bitcoin, it goes down with the equity.

Mm-hmm. Yeah. It's a little bit more correlated to the equity market. It is usually a bullish or bears. Signal [00:29:00]whether Bitcoin is going up or down, and that's not true with gold. One of the reasons we really like gold for portfolios is that it is uncorrelated, and this is one of the reasons why people like bonds originally, which is you want something that's not gonna be behave like equities when equities go down.

And so while, while gold doesn't automatically go up. When equities go down, it does enough of the time or is this, is stable enough of the time that it's a good thing to have in your portfolio to balance, uh, both equity and bond. Behavior because gold is not correlated to bonds directly either. And so, uh, we view that as a, a, a portfolio stabilizing asset.

The other thing that we look at, which was a very effective, uh, hedge for equities, especially in 2022, is energy. 

Lori: And it also was in the seventies. Yeah, when you had late seventies, early eighties, people say, well, the late seventies, early eighties isn't a really [00:30:00] good example because you had something going on that was specifically bullish for oil and that in today's day and time, you don't need as much oil as you did in the 1970s.

There were other alternative. Uh, forms of energy. And so it's not as inelastic, which means you have to have it and you'll pay anything you need to, to get it. That's an easy way of explaining it, I think, 

Lisa: you know, and, and, and to give credit where credit is to Goldman Sachs wrote a pretty good article, um, called The Strategic Case for Gold and Oil and Long Run Portfolios.

And this is really particularly oriented to inflation. Uh, and they look at when bonds and equities. Fail to diversify, where else can you go? And they really divided the inflationary regimes into two categories. One was inflation from a supply shock. So that's exactly like the 1970s where there was a sudden decline in the supply of oil, which [00:31:00]made oil prices, you know, skyrocket.

That's an inflationary scenario where hedging with oil is really valuable or energy and, and the same thing happened in 2022 because you know, with the invasion of Ukraine by Russia, there is less concern about lower supply of oil in the world. And then the other regime is one of just inflation from institutional, what do they call institutional credibility risk, which is code for, we don't believe the Federal Reserve has a good handle on.

Controlling, uh, the money supply in the economy. 

Lori: Right? And we're worried 

Lisa: about US debt or you're worried about Yeah. The role of the US and international markets and so, 

Lori: or you don't wanna have the US be the reserve currency. You say, I don't want the US to have the reserve currency. Why should I have to trade in dollars?

Why can't I just trade it? No. And some people 

Lisa: are acting on that. So in these scenarios where there are things going on, uh, either geopolitically or feelings about, you [00:32:00] know, institutions like the Fed that are negative, those are good circumstances to hedge with gold. 

Lori: Gold really does tend to perform well in markets that are under stress when there's high inflation or wearing confidence in fiat currencies and government debt wanes.

And so we can anticipate any of those possibilities in the next year easily. And we've seen them 

Lisa: in the past year. 

Lori: Yes. In early April for starters. So the question we get is how much gold is enough in a portfolio? 

Lisa: Well, what I would say first is that in order to really make an impact on your portfolio, you really need to have close to 5% of something.

If, if you want it to make a difference. Now, some people are bigger believers in gold than others. Um, so you know, a traditional portfolio might hold two to 5% in gold. We have [00:33:00] held at least 5% in. Physical gold. There's an ETF called GLD that holds physical gold. It's a little different. It's not quite physical 

Lori: gold.

Oh yeah, it gold 

Lisa: in a, in a vault, in, in uh, s right. You also 

Lori: can actually hold, you can buy it 

Lisa: yourself, but we don't generally try and make people do that. So, you know, we've had a 5% gold position as part of our non-equity. Portfolio is an alternative to bonds, and recently it's gone up to 10%. Well, that's when we include, include the equities.

Yeah. When people look at periods that are highly risky in terms of macroeconomic risk, political risk. If you see equity bond correlations ticking up, which we have been, you can look at going to five to 10% gold. And you know, this is all based on your portfolio, your own risk tolerance, your investment goals.

So we can't say to anyone that we don't know and haven't looked at their financial plan how much [00:34:00] gold they should have, but these are. The ranges that people talk about, and you can have a mix of actual GLD, which relates to physical gold and gold miner stocks, and that's basically what we do. We have both.

How much 

Lori: energy. Or how much oil is enough. That's an even tougher question. The things that we read is that we really don't have as much oil as people seem to think that we have. But also the demand may not be as great because there are alternative energy sources. There's wind, there's sun, there's uh, nuclear, there's gas, so there are alternatives.

You don't just need oil. How much do you need? We look at energy as an entity, if you will, and we don't just have oil, um, we have a, a small position in an oil company. Um, and that is because these [00:35:00] companies have done a really good job of trying to. Return cash to shareholders and not just drill, baby drill.

And so we own that as, as a hedge, but we also have other energy positions. They've done quite well. I'm, I'm afraid to say anything. It's like being on the cover of Sports Illustrated, I'm afraid. But we have held a uranium producer and we've held gas, which people have. Started to believe in natural gas.

Natural gas. That's what we've decided to do. Yeah, and it's only 3% of the s and p. I'm scared to to say how much we own, but it's been great for portfolios. And again, please don't, please don't put me on the cover of Sports Illustrated. 

Lisa: Well, let's talk about the long game in terms of how we look at these things.

We've kind of given you scenarios that relate to today, but you know, when you're developing a portfolio, your hedge doesn't work. If you [00:36:00] rush to buy it after there's already a problem and gold has already gone up, or energy has already gone up, what you have to do is position your portfolio and have long-term hedges that you know sometimes.

You're going to think, uh, this is kind of a drag because equities are going up, but they have to be in place so that when equities go down, you already own them when they start to perform. And so we look at this as own gold. Own energy as a, a long-term buffer to your portfolio insurance. And it'll cover, it'll, it's like insurance and it'll cover a lot of different scenarios if you own both of them, because it can protect you against supply shock inflation.

It can protect you against geopolitical instability. Concerns about us. Financial institutions. So you're ready for a lot of scenarios if you own, you know, extra amounts of energy and amounts of gold. And it's just a long-term portfolio position. 

Lori: And I wanna say, [00:37:00] I have seen the Warren Buffet Instagram, uh, dear friend of mine sends it to me all the time, which talks about how much money you would've made if you put your money in the s and p 500.

I don't know what the date was. He's. 90 some odd years old, so maybe 90 years ago. If you look at compared it against to what you would make if you put your money in gold, he makes the point that you would've made so many hundreds of times your money on the s and p 500 versus gold. And my friend sends it to me and says, see?

And I said to him, well, I look at it a different way. I look at it as insurance. You have insurance on your house. And you have insurance on your car and you hope that you never have to use that insurance, but do you ever make money on insurance? At least I made something on my insurance. 

Lisa: Well, and also, you know, people who do like, you know, long term, maybe not [00:38:00] 90 years, but comparisons of gold to the s and p 500.

There are plenty of. 30 year periods where gold has kept up with gold. It kind of depends. If, if gold has skyrocketed and it's really expensive, you know, the next period is probably not gonna keep up with the s and p 500. But if gold is cheap, it can totally keep up. And it has in the, in the past it's not always 

Lori: true that it doesn't.

And gold has gone up a lot recently, but so is the s and p 500. Yeah. So, um, I would argue buy some, just buy some and put it in your back pocket and sleep at night with it. I, I'll also make the point as interest rates go up, if you own physical gold or the GLD, which is a proxy for it, you don't get, there's no income.

No income. So it's costing you money. It is costing you money if the price doesn't go up. So that is one thing to be aware. Yeah. Versus 

Lisa: a bond that you know is yielding four or 5%. Um, your gold is yielding zero, so you're really [00:39:00]completely dependent on price appreciation. If you want appreciation. Yeah. Well, and we should reiterate, we put our money where our mouth is.

Like we're talking about this and we have these, we've been, we've been in gold. We have these things in our portfolios and, 

Lori: and have had it for a long time. We first started writing about gold in 2019, and as we said, we had about a 5% position probably in GLD and, and in. Equities and I can 

Lisa: tell you that has outperformed bonds, you know, multiple times over that time period.

The goal, our goal positions have done far better than bonds over the same, same time. And 

Lori: we have increased that, um, more in the last couple of years. And we maintain an energy position, which I've talked about. There's no other way to hedge energy risk other than buying energy. So if. God forbid, you know, energy prices go up.

And by the way, that is a big reason why inflation hasn't been higher than it was. Yes. [00:40:00] The only way to hedge against that is to own energy. So that's the only other thing, and, and we've done it. We have put our money where our mouth is. So that's all. If you would like to talk to us about this or we can help you, you know, hedge your portfolio, please give us a call or reach out to us on our website we're Lori@2xwealth.ingals.net, or Lisa@2xwealth.ingles.net Our phone numbers are there. We do answer our phones and, uh, would love to help if we can. That's all for now.