A month after Brexit, it's still too soon to know what the vote means for the European Union, the U.K. and the U.S. But one thing is certain: The world is a riskier place for investment portfolios based solely on stocks and bonds.
The highs of quick market index rebounds in recent weeks should not be not enough to inspire confidence in investors. After all, "stocks can't go up forever" noted the Wealth Adviser in The Wall Street Journal.
The Chicago Board Options Exchange's Volatility Index (VIX), which The Wall Street Journal calls the market's "fear gauge," offers a healthy reminder of this. Its price chart documents a half-dozen spikes in the last year and illustrates the roller coaster ride that is large-cap U.S. equities.
The take-away here is that the stock market is getting to be a riskier place to build wealth. That doesn't mean investors should abandon equities—far from it. Because staying on the sidelines has risks too: When the market turns around, you're left behind.
Investors should aim instead to build a portfolio that withstands market shocks.
Bonds are also risky. Traditionally, in a weak business climate, the fixed yields of bonds look more attractive as stock prices fall. But the traditional inverse relationship between stocks and bonds has broken down in the last two decades, notes The Wall Street Journal.
With uncertainty about both the economy and interest rates, bonds prices are showing new volatility, notes market analyst Market Realist. What's more, bonds are proving less of a hedge on the rise and fall of the stock market -- there's often no correlation in prices between stocks and bonds, notes CNBC's Trading Nation. Or they move in the same direction, notes a BlackRock analyst.
As a result, the traditional stock-and-bond mix fails to buffer investors against economic downturns.
A 2016 McKinsey Global Institute report suggests the combination of higher interest rates, lower economic growth and weak corporate profits is here to stay — and a portfolio made only of stocks and bonds will generate lower returns for years to come.
If stocks and bonds can't be counted on, what's the alternative? Alternative investments.