Global tensions resurfaced in the past few weeks after giving the world markets a respite for several months. Tensions on the Korean peninsula have flared to their highest level in years, pitting the world’s two largest economies (United States and China) at an impasse over the most-favored diplomatic solution to the ongoing escalation of rhetoric coming from the isolated nation. Brexit, unrest among the Middle East nations, and political upheaval in Latin America are also giving investors pause. The result has been an influx of capital into U.S. Treasuries to the point that Alan Greenspan hinted that a bubble may exist. As external forces exert pressure on equities rather than the underlying performance of the companies those certificates represent, investors may want to consider how to reposition their portfolios.
Additional pressure on investors to begin repositioning their portfolios comes from the age of the current economic recovery. Stock indexes continue to set new high watermarks, unemployment is below the crucial 5-percent threshold, and home prices have reclaimed lost value in nearly every market. The nation is now eight years into the recovery, and it can be argued that we are in a period of prosperity. Typically, investors begin to diversify their portfolios late in growth cycles to avoid being overexposed to a bear market. However, the bond markets are not offering an attractive diversification.
In August, the Chicago Board Options Exchange (CBOE) Volatility Index , also known as VIX, hit 16 for the first time this year as traders worried about a combination of overseas pressures on global markets, the impact of hurricanes on the economy, and reservations about an overpriced stock market. Some investors are beginning to look at real estate as a diversification. While REITs are correlated with the stock market, single-family rental (SFR) properties offer a true diversification from the equity and bond markets. Home prices and the S&P 500 are not correlated, providing investors with a hedge against the stock market. Another advantage is rent growth. Although prices have been climbing, rents also have upward growth potential when home values are rising. As uncertainty dents retirement portfolios, savvy investors will consider diversification with real estate to dissipate volatility through the end of the current expansion and through the next recession.