Last weekend, I attended a biannual family reunion that began more than thirty years ago. As is usually the case, my cousins and I discussed how we are managing our personal finances as we matriculate into retirement.

We’ve been having this conversation for a long time. It has been interesting to see how our attitudes towards risk have changed over time. Ten years ago, most of us were much more risk tolerant than we are now.

In part, that is due to the massive rise in the stock market since then. Ten years ago, the S&P 500 Index was hovering around 2,000. A few weeks ago, it hit an all-time high near 5,700. The NASDAQ Composite Index has done even better. It has quadrupled over the past decade.

Another big change is bond yields. Ten years ago, the yield on the 10-year Treasury Note was about 2.6%. Now, it is above 4.0%. That means an investor can earn 50% more interest on three to four times the amount of money than a decade ago.

Numbers like that will change your attitude towards risk. So will age, which lessens the amount of time you need to live off that money as you get older. Add it all up, and our newfound financial conservatism was all but inevitable.

Gold Standard

Despite those very favorable conditions, none of us have all our money in bonds. Although fixed income securities are great for generating current income, they afford no protection against inflation.

You may think that inflation is no longer a problem given the big drop in the consumer price index (CPI) over the past two years. In June 2022, the annual growth rate for CPI peaked at 9.1%. In June of this year, it was down to 3.0%.

At that rate, the cost of living would increase 65% over the next seventeen years. Coincidentally, that is approximately how much longer the actuarial tables say that I should expect to live.

Like most people, I expect to do better than that. Longevity runs in my family, and I’m in good shape for my age.

For that reason, I need some inflation protection in my portfolio. The last thing my wife and I want to worry about is outliving our money.

When it comes to inflation hedges, you can’t do much better than the stock market. Sure, commodities such as gold tend to spike when inflation is surging. But over the long run, stocks are the better way to maintain purchasing power.

Consider this: The past five years included a devastating global pandemic that forced central bankers to flood the financial markets with money. As a result, commodity prices soared.

For that reason, the price of gold rose 50% over that span. At the same time, the S&P 500 Index gained more than 80%.

Pendulum Swing

These days, cryptocurrencies such as Bitcoin (BTC) are heralded as a better hedge against inflation. Over the past five years, Bitcoin has increased eightfold in value.

I am intrigued by Bitcoin as an inflation hedge. However, I don’t know if I trust it enough to bet my life savings on it.

Instead, I will stick to what I know best which is the stock market. Despite the occasional crash, I have faith that stocks will appreciate over time.

As every investor knows, the key to risk management is diversification. Not just in terms of sectors, but also market cap and geography.

Sometimes, such as the first half of this year, large cap stocks perform better than smaller companies. Other times, the opposite is true.

Also, the United States is seldom the world’s top performing stock market. Over the first seven months of this year, the stock market index for Turkey was up 46%. Pakistan was next at a little over 23%. India, which I wrote about last week, was up 22%.

By comparison, the S&P 500 Index gained 17.2% over the same span (circled area in chart above). That would rank it below Taiwan (19.4%), Italy (18%), and Greece (17.7%).

That list could look very different a year from now. China’s stock market has been mired in a slump for several years. The same is true for its regional neighbors Viet Nam and South Korea.

I expect that trend to reverse soon. Those countries are making big investments in artificial intelligence (AI) and robotics that have not yet paid off.

When that happens, the pendulum could suddenly swing the other way. To fully benefit from that development, you need to start building positions in those companies now. That isn’t my area of expertise, but it is for my colleague Robert Rapier.

WATCH THIS VIDEO: Inside “The Income Zone” With Robert Rapier

Robert Rapier is the chief investment strategist of Utility Forecaster, Income Forecaster, and Rapier’s Income Accelerator.

Robert is one of the world’s foremost experts on energy and income investing, but his deep knowledge also extends into other profitable segments, such as AI.

Robert has found a better way to make money from the AI super-boom, thanks to a group of under-the-radar tech plays. Robert is locked in on AI right now because of the incredible income opportunities it has created. To learn more, click here.