The New Allocation

2020 has changed the landscape of the world and America in ways few could have imagined at the beginning of the year – both socially and financially.

The U.S. economy has taken a beating with unemployment reaching as high as 14.7% in April – the highest since the Great Depression – and GDP shrinking 32.9% in the third quarter. Economists don’t see GDP returning to pre-COVID levels until 2023 and the economy returning to full employment until 2025.

Economists have warned against reading too much into the rally on Wall Street.

Although the Dow has just hit a record high – the first since hitting the last record high in February – this is more a function of young, bored, and homebound investors exploring day trading en masse than any solid underlying economic fundamentals.

Online brokers like Charles Schwab, E*TRADE, and Robinhood have all seen record new account signups, but with the Dow currently trading at a PE (Price/Earnings) ratio of 28.6 – nearly double the historic average of 15 – stocks are overvalued and bound to come crashing back to earth.

With a beaten up economy and uncertainty on Wall Street, investors have flocked to gold in hordes as a hedge against inflation – evidenced by a gold price hitting a record high recently.

This strategy has proven historically to be more a case of striking fool’s gold than striking it rich in the past. The last time gold hit a record high in 2011 in the aftermath of the Financial Crisis it bottomed out in 2016 – dropping more than 40% from the previous record high to a new all-time low. It’s likely to happen again.

With “social distancing” creating a new “quarantine economy” hampering certain industries like travel, retail, transportation, entertainment, and hospitality while boosting others like those connected to remote work and mobile and in-home entertainment, many have found themselves out of work or having to learn new skills or take on new responsibilities to survive. 

On the housing front, with incomes diminished, many are downsizing to more affordable to mid-range multifamily housing where supply was already constrained.

Those who were cruising along and satisfied with the status quo suddenly find themselves in unfamiliar territory. Suddenly jobless, many are wondering where their next paycheck will come from.

Those who were heavily allocated towards Wall Street and suddenly saw their portfolios shrink overnight are now faced with uncertainty.  

This all begs the question. Why has the smart money stayed away from both the stock market AND gold? The answer is their investment allocations have ALWAYS avoided stocks and gold as a hedge against recession and inflation.

In this new economic landscape, is it time to follow the smart money and pursue a new allocation?

Many in the old economy are certainly wishing they had done things differently – never wanting to feel helpless again, wondering when their next paycheck will be. The smart money never has to worry about the next paycheck. Their portfolio is allocated differently than mainstream investors.

The two overriding concerns that have risen to the surface for many in the wake of COVID-19 are:

  • How to preserve income?
  • How to avoid Wall Street volatility?

Where to allocate for a new economy? Look to the smart money – the ultra-rich and institutional investors – who were prepared for the current economic turmoil and who were never worried about maintaining income or preserving capital.

These investors didn’t rely on their jobs for income and didn’t see their capital shrink on Wall Street. That’s because these investors are heavily invested in alternative assets – investments that produce consistent cash flow backed by tangible assets.

That’s why the smart money loathes gold. It just sits there, not producing any cash flow. Income-producing tangible assets are why the smart money was prepared for this new economy or any economy for that matter.

Why cash flowing real assets? It’s because they offer the type of diversification public equities can’t offer to insulate income and assets.

Alternative investments allow you to diversify across:

  • Asset Class.
  • Stage of Development.
  • Investment Vehicle.
  • Type of Return.
  • Holding Period.
  • Geographic Location.

A portfolio spanning a variety of geographic locations and asset classes are equipped to withstand any economic assault on your portfolio.

A new allocation in a new economy will give investors smarting from the recent recession the opportunity to avoid disasters in the future.
For future allocations, look not only beyond Wall Street but look beyond borders and asset classes to not only preserve income and capital but to thrive in the new economic landscape.


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Logan Freeman

Building generational wealth with alternative investments