'Risk Off' Assets Are Finally Working Again

The regional banking crisis hasn't infected the overall stock market. The S&P 500 Index is down just 2% in the past two weeks.

But a crash isn't the only sign of panic in the investing world...

Two "risk off" assets have been moving higher in recent weeks. And that's a major change.

You see, both assets have a history of hedging portfolios during tough times. But neither did a good job of it last year. Now, they're starting to rise again. And if the trend continues, both assets could be smart additions to your portfolio.

Let me explain...

The simplest way to divvy up asset classes is to separate them into two categories: "risk on" and "risk off."

Risk-on assets tend to go up the most during good times. Stocks are an example. And high-growth stocks – which tend to be more volatile – usually perform even better when investors are euphoric.

Basically, the further out the "risk curve" is, the better risk-on assets will perform in the good times.

Risk-off assets are the exact opposite. These investments hold a portfolio together during tough times. They tend to do well when scared investors want to take less risk. So folks buy these assets for safety.

U.S. Treasury bonds and gold have been two of the most consistent risk-off assets throughout history. They're the go-to assets for investors worried about an economic meltdown.

In 2008, for example, the iShares 20+ Year Treasury Bond Fund (TLT) – which holds a basket of long-term Treasury bonds – was up 34%. Gold – represented by SPDR Gold Shares (GLD) – also held up, with a 6% rise that year.

The same wasn't true in 2022, though. These risk-off assets didn't perform well at all when investors needed them. Take a look...

Long-term Treasury bonds fell more than stocks last year. Gold went nowhere. And as you can see, these assets mostly moved up and down in lockstep with the stock market.

That's not the performance we'd expect from these risk-off assets. But it happened because interest rates soared. Higher rates meant more competition for gold, which pays no yield. And long-term bonds with lower yields took a hit for the same reason.

As a result, risk-off assets failed miserably at their job. But now, things could be changing...

The recent banking crisis has frightened investors. And while stocks dropped 2% in the last two weeks... TLT went up 5% and GLD jumped an impressive 9%.

These hedges have gone back to protecting investors. And that's likely to continue. Given the turmoil in the banking sector, the Federal Reserve might stop hiking interest rates... which means risk-off assets could be back to normal for the foreseeable future.

These assets are finally doing their job again. That doesn't mean they're certain to go up. But it does mean you should consider owning them as a portfolio hedge today.

Good investing,

Brett Eversole

Further Reading

"Last year's script has flipped so far in 2023," Brett says. The sectors that kicked off this year as winners were some of the worst performers from 2022. And when the trend changes, it's important to pay attention... Read more here.

"Over the long haul, you want your money in stocks," Dr. David Eifrig writes. "The question is how much." One asset outside of stocks can offer you safety in tough times – and the benefits may go even further than you think... Learn more here.