10 Asset Classes For 2025

Summary

In this video, the presenter provides a comprehensive overview of key asset classes, including stocks, bonds, gold, Bitcoin, REITs, commodities, and emerging markets. He highlights the risks and rewards associated with each, emphasizing the current overvaluation of stocks, the stability of short-term bonds, and the speculative nature of Bitcoin. The video also discusses the value of gold as a hedge, the impact of interest rates on REITs, and the potential for investing in commodities at a margin of safety. For those seeking stability, the presenter recommends cautious investment in low-risk assets like short-term Treasuries and suggests alternative investments like solar panels for homeowners.

Takeaways

• 😀 Stocks are currently highly priced from a historical perspective, with a low dividend yield of 1.21% compared to the historical 4%, suggesting negative real returns over the next 7 years.
• 😀 Bonds, especially short-term U.S. Treasuries, offer a safer investment with relatively low risk and a 4% annual yield, making them a better option for risk-averse investors.
• 😀 Gold has become more expensive due to heavy purchases by central banks, but it's still valuable as a fixed portion of your portfolio, despite not being a productive asset.
• 😀 Bitcoin is a speculative, illiquid asset driven by market flows, rather than fundamental value. It carries high risks and could crash when the market flows reverse, despite some success stories.
• 😀 Real Estate Investment Trusts (REITs) are primarily interest rate-dependent, and with higher rates, their performance has been flat. Investors should focus on the yield for long-term stability.
• 😀 Warren Buffett's approach of holding cash and using low-risk assets like 3-month Treasuries provides stability and hedges against market downturns, offering protection in uncertain times.
• 😀 Currencies generally lose value over time due to inflation, and predicting currency movements is nearly impossible. A balanced exposure to currencies is a prudent strategy for investors.
• 😀 Commodities, including oil, are fairly priced with medium risk and reward at present. Value investors should wait for better opportunities, buying commodities when they are near production cost lows.
• 😀 Emerging market value stocks offer higher real returns, but investing in these markets requires expertise, as they are prone to volatility and sentiment-driven cycles of booms and busts.
• 😀 Solar modules and home improvements, like installing solar panels, can be a smart investment in the current environment, offering long-term savings and value despite the crowded market for private equity.

Q & A

Why is the stock market considered to be highly priced right now?

The stock market is considered highly priced because the price-to-earnings (P/E) ratio is at its second-highest level in the last 150 years, indicating inflated valuations. Despite a 27% increase in market value last year, the earnings yield is only around 3%, primarily spent on stock buybacks, which suggests low returns for the risk involved.

What is the predicted return on U.S. stocks over the next seven years?

According to GMO's real return forecast, U.S. markets are expected to deliver a negative real return over the next seven years, due to low dividend yields and high current market valuations. The average dividend yield is currently 1.21%, which is much lower than the historical 4%.

Why are U.S. Treasury bonds considered a safer investment compared to stocks?

U.S. Treasury bonds, especially short-term ones, are considered safer because they carry very low risk. The U.S. government guarantees repayment, making them a stable and predictable investment. Short-term Treasury bonds are currently offering returns of about 4%, which is favorable when compared to the high risk in stocks.

How does the price of gold relate to central bank purchases?

The price of gold has risen significantly, largely due to central bank purchases, especially from countries like Turkey, India, Poland, and China. These central banks are buying gold as a hedge against economic instability, which increases demand and drives up prices.

What is the general investment strategy regarding gold?

The recommended strategy for gold is to maintain a fixed exposure in your portfolio (e.g., 5%). If gold prices rise, you should trim your exposure to maintain the fixed percentage. Conversely, if prices drop, you can increase your exposure. This strategy helps manage volatility and lock in profits while maintaining stability.

What is the key concern with investing in Bitcoin from an asset perspective?

Bitcoin is seen as a speculative asset rather than a productive one. It is relatively illiquid, and its price is driven by investor flows, not intrinsic value. While it has experienced significant price increases, its market is highly volatile and driven by external factors like institutional inflows, making it a risky investment.

What should investors be cautious about when investing in Real Estate Investment Trusts (REITs)?

REITs are closely tied to interest rates, so when interest rates rise, REITs tend to fall in value. Currently, with higher interest rates, REITs have been less attractive, offering flat or modest returns. Investors should carefully monitor interest rates and avoid chasing higher returns based on the expectation of falling rates.

What are the advantages of hedging in a portfolio, and how does Warren Buffett do it?

Hedging can protect against market downturns and reduce overall risk. Warren Buffett, for example, keeps 30% of Berkshire's assets in cash, acting as a hedge against market volatility. Investors can also hedge by using options, like buying put options, to protect their portfolios from significant losses in case of market crashes.

How should investors approach commodities like oil in the current market?

Commodities, including oil, are currently fairly priced, presenting a medium risk and reward. The key to successful commodity investing is buying at a discount to production costs (e.g., 75% of production cost). For oil, it's crucial to wait for better opportunities when prices are lower, offering a margin of safety.

What is the outlook on emerging markets as an asset class?

Emerging market value stocks offer high real returns, but they come with volatility. Sentiment-driven booms and busts are common in these markets. Investors should approach with caution, understanding that emerging markets require expertise and a strategic, long-term outlook to avoid significant losses.