Some risks are easy to guard against. If you’re worried about a spike in inflation, owning commodities is the obvious choice. After the onset of the coronavirus pandemic in March 2020, the Fidelity Global Commodity Stock Fund (FFGCX) more than doubled in value over the next two years.

I recommended that fund to my readers at the same time it began that historic run up the charts (“Your Best Bet Against Stagflation”). As I expected, inflation soared as the Fed pumped money into the economy to prevent it from collapsing. Consumers had more money to spend on goods, which drove up the cost of the basic materials that go into them.

If you’re concerned about geopolitical instability, then owning gold might be a good way to go. That’s why I recommended the SPDR Gold Shares (GLD) exchange-traded fund to my readers shortly after Russia invaded Ukraine in 2022 (“A Pick and Shovel Play on Gold”).

One year later, that fund had gained 6% while the SPDR S&P 500 Trust (SPY) lost nearly 10% over the same span. Despite cryptocurrencies’ claim to be “digital gold,” investors still want the yellow metal when times get tough.

For those reasons, I believe commodities should be a part of every investment portfolio. Even though they pay no dividends and have limited capital appreciation potential when inflation is low and the world is calm, it is only a matter of time until one or both of those conditions will change.

Too Much Time

It is also only a matter of time until the next economic recession comes along to knock the stock market off balance. Since the Great Depression nearly a century ago, there have been fifteen recessions in the United States.

The average length of those recessions has been 10 months. If you do that math, that is 150 months of economic contraction over a 1,200-month period, or roughly 8% of the time. That’s too much time for your portfolio to be taking a beating.

While the economy is contracting, the stock market is usually falling. At the same time, commodity prices drop since demand for the goods from which they are made is also declining.

Historically, there is only one asset class (excluding cash) that has produced a positive total return during recessions, and that’s bonds. During a recession, central bankers cut interest rates to encourage spending. And when interest rates drop, bond prices rise.

That is one reason why the Fed decided to start raising interest rates in 2022 as inflation took off. It cut interest rates to almost nothing two years earlier in response to the coronavirus pandemic as part of its zero interest-rate policy (ZIRP). As soon as that was over, it needed to raise rates so that it would have a tool to use to stabilize the economy when the next recession hit.

During the depths of the pandemic, the yield on the 10-year Treasury note fell to 0.5%. That pushed its price to an all-time high. By the fall of 2022, the yield rose above 4% after numerous interest rate hikes by the Fed. That pushed its price considerably lower.

The Fed can just as easily reverse that process the next time the economy hits the skids. While stock and commodity prices are on the wane, rising bond prices can keep the overall portfolio value within tolerable limits.

Works Both Ways

In my role as chief investment strategist for Personal Finance, I am sometimes asked what type of bond investment is best. Of course, that depends on several factors, so the answer isn’t the same for everyone.

What I can say is that unless you have a lot of money to invest in bonds, you would probably be better off owning a bond fund. Unlike stocks, which can be bought in odd lots at a very low cost, bonds are much more expensive to trade in small amounts.

One bond fund I like for this purpose is the Vanguard Intermediate-Term Investment Grade Fund (VFIDX). As its name implies, the fund owns bonds rated BBB or better with an average maturity of roughly seven years.

Ten months after the onset of the pandemic, its share price crested above $10.70. By October 2022 it had fallen below $8.00 after several interest rate hikes by the Fed. That works out to a decline of more than 25% in less than two years.

That’s bad news if you bought this fund while interest rates were low but is good news if you buy it while rates are high. The next time a recession hits, its share price can just as easily head back up.

That is why I think it makes sense to overweight bonds near the end of a Fed rate raising cycle. Bond prices can’t go much lower but could escalate quickly if the Fed starts cutting rates to stimulate the economy.

Editor’s Note: My colleague Jim Pearce just pinpointed for you current risks and opportunities. But the above article only scratches the surface of his expertise.

In addition to guiding Personal Finance, Jim Pearce also is chief investment strategist of our premium service Mayhem Trader. He has spent the past year perfecting a powerful indicator that’s designed to make money in a hostile market.

Jim has a proven knack for reaping profits from Wall Street mayhem. To learn more, click here for details.

Subscribe to the Investing Daily video channel by clicking this icon: