My prediction is that it will be more difficult for both U.S. stocks and bonds to go up in the coming years. Either the economy will recover and push interest rates higher and bond prices lower or we will experience a double-dip recession with falling stock prices.
Surprisingly, even after all this, the stock market is expensive; we usually do not begin an economic recovery with stock prices close to all-time highs. But this is not a typical recession. Conversely, bonds are a less appealing investment with interest rates dropping.
We came into this crisis with a trillion-dollar deficit and very low interest rates, challenging our ability to fight this recession with standard measures, such as government spending and central bank interest rate cuts.
Because the stock market is significantly overvalued at this time, now is an excellent time to consider rebalancing your portfolio. By rebalancing instead of selling what has gone down or buying what has gone up, investors remain diversified but go back to their original allocation. So while diversification is about the eggs, asset allocation is about the basket. What percentage of your basket is going to be in stocks and bonds?
