Looking at the big pictures, I think it is less important to necessarily find a substitute for bonds, but rather look for an asset that is likely to go up when stocks go down. Most of us are heavily invested in stocks, and they are overdue for a correction, if not an outright scary bear market.
Bonds are the traditional asset that you use to hedge against stock drops. Unfortunately, it is hard to imagine any scenario in today's environment, where there will prolonged bear market without interest rates going up and hence bonds going down.
Agreed, which is why I advocate hedging with options instead of buying yet another asset with a historically unprecedented valuation and no guarantee of negatively correlating with your other assets.
My personal choice is real estate. It provides decent income, especially in LCOL or MCOL areas. While higher interest rates, and a weaker economy will hurt real estate, inflation fears will help out.
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There are fair number of folks who think you can get diversification into real estate by buying REIT. I mostly disagree. I think REITs are highly correlated with stocks. Plus most REIT invest in commercial real estate, not residential. After another Covid variant, the one thing I'm sure the county doesn't need for the next 5 year is more retail and commercial office space.
So you'd buy real estate as an individual property, but you wouldn't buy it if it was packaged as an REIT? I can't think of a good reason to hold this perspective unless you were afraid that stock market volatility would cause you to sell the REIT shares low, but that the difficulty of selling physical RE would prevent you from making such an impulsive move at the bottom. Yes, dividends can be cut, but physical properties can be much more volatile, with multi-month vacancies and huge repair bills squeezing already-thin margins into negative numbers on a regular basis.
I'd say if you have a portfolio of REITs yielding close to your withdraw rate, you let it ride through the dips no matter what. That's how you would treat physical RE. The point would be to generate some baseline amount of income so that you don't have to sell as many index fund shares during a downturn. If your income needs are covered, it doesn't matter what Mr. Market is offering today.
I do agree with your point about office and retail properties. My company went from 100% physically meeting in an office building to 100% remote within a matter of a few months. Our very nice office building is now an obsolete multi-million-dollar wasting asset, thanks to VPN and Microsoft Teams. I hope they sell it before prices for office buildings collapse, because everyone else is learning the same thing at the same time.
In early 2020, I figured that Covid would really hurt the market, so I started writing at the money calls on SPY. The 2020 correction was short-lived, but I thought prices would resume going down down, so I continue to sell them. I finally gave up in Nov. after it looked like a vaccine would be here soon. But this was after spending a couple hundred thousand on options. Instead, of selling calls I could have bought puts,but the result would have been the same the puts would have expired worthless. Portfolio insurance is expensive, especially in a time of uncertainty.
I have a question were you retired in the 2000 dot com bubble or the 2008 recession?
I was in both. In early 2000, I sold almost all of my tech stocks (combo of luck and skill) and put the money in TIPS, Muni bonds, some other corporate bonds and index fund. I weather the 2000-2002 bear market, well. The value of my bond holdings, almost offset the loss in stocks as interest rates fell.
In the mid 2000s I started buying valuing stocks, with a focus on dividend stocks. My philosophy was the same as yours, I have enough income that I wouldn't need to sell stocks. So by 2006/7, my portfolio, had a lot of banks, a few utilities, a lot of REITs, a fair number of energy master limited partnership (energy stocks), along with boring old companies, like GE, Coke and General Mills.
As you probably know banks got cloppered and eliminated their dividends, even companies like GE slashed their dividends. As did many REITs, in fact REITs lost the same as the S&P about 45%.
Overall dividend cuts were less than stock declines, but my income dropped below my needed withdrawal. So REITs didn't really help they acted just like regular stocks. Now admittedly in certain markets, real estate crashed really hard, but I don't buy real estate in hot markets.
REIT pricing has very little to do with the value of the assets they hold, it is primarily interest rates and the P/E rates for the stock market as a whole.
I suppose 11 tenants, in 3 different cities could all decide to find new apartments, and my property managers couldn't find replacements but it seems unlikely since it didn't happen during Covid.
