Right now, the world's eyes are glued to the European continent, waiting to see if European Central Bank officials can somehow find a way to keep the eurozone experiment alive. As heavily indebted nations teeter on the brink of insolvency and sovereign bond yields soar, the region appears almost certainly headed toward recession, while talk of certain countries leaving the euro is becoming more widespread.
While it remains to be seen how aggressively the ECB will act to stabilize the area, there is little doubt that the eurozone is in for a rough ride moving into 2012. This will have a dampening effect on economies across the globe, but there are a few investments that will benefit from the ongoing crisis.
Still a safe haven
Despite next-to-nothing yields, U.S. Treasury bonds are likely to get a boost from extended drama in the eurozone area. Even though the U.S. faces its own boatload of long-term fiscal problems, our government debt is still seen by world markets as one of the safest bets going. Yields on 10-year Treasuries are hovering just below 2%, indicating little concern that the U.S. will have trouble repaying its debt in the coming years. U.S. government debt remains immensely popular despite these middling yields, with the iShares Barclays 7-10 Year Treasury Bond ETF (NYSE: IEF ) up 14% year-to-date, at a time when the S&P 500 index is down about 6%.
All investors should have some broad fixed-income exposure via a well-diversified actively managed mutual fund or exchange-traded fund like iShares Barclays Aggregate Bond ETF (NYSE: AGG ) . However, investors worried about the potential effects of a credit tightening spillover from Europe may want to focus more heavily on government debt, to the exclusion of corporate bonds. In that case, two of the most inexpensive ETFs that focus on this area are Schwab Intermediate-Term U.S. Treasury ETF (NYSE: SCHR ) and iShares Barclays 3-7 Year Treasury Bond ETF (NYSE: IEI ) . Regardless of where you are in your investing life cycle, bonds should have a place in your portfolio, as their volatility-reducing powers are needed more now than ever.
All that glitters
Of course, if the eurozone situation deteriorates, gold will likely continue to shine. Without a doubt, gold has been on an impressive run, with the price of the shiny metal skyrocketing from around $300/ounce a decade ago to roughly $1,700/ounce today. While a lot of that rise has been fueled by fear and uncertainty surrounding the financial crisis several years ago and the eurozone situation today, there's still a reasonable chance that gold could move higher -- especially if European officials can't get their act together and allow the region's financial troubles to bring down the global economy.
Investors who add a small allocation to commodities such as precious metals may benefit from the added layer of diversification. Here, a fund like PowerShares DB Commodity Index Tracking ETF (NYSE: DBC ) could be a reasonable choice. Folks solely interested in exposure to gold can fall back on two of the more popular ETFs of recent years, SPDR Gold Shares (NYSE: GLD ) or iShares Gold Trust ETF (NYSE: IAU ) . With price points of 0.40% and 0.25% respectively, these funds offer some of the cheapest avenues to gain access to gold.
It goes without saying that U.S. Treasuries and gold have done extraordinarily well in recent years as risky assets have lost favor in the marketplace. And while I still believe equities offer the best chance for long-term capital appreciation, worldwide stock markets are likely to have many more volatile days ahead of them in the coming year. Investments like gold and U.S. Treasuries may offer a safe haven in these tumultuous times, but it's hard to argue that investors aren't "buying high" when purchasing these asset classes today.
Gold prices are at historic highs, and Treasuries have been buoyed by historically low interest rates. While there may still be room for these asset classes to run, especially if the eurozone situation goes from bad to worse, don't except their category-topping performance of the last few years to continue like this forever. They may provide downside protection in the next year or so, but I'd say U.S. Treasuries and gold are a lot closer to the end of their bull run than to the beginning.
Ultimately, there is a definite place for bonds and commodities in any investor's portfolio. While folks in retirement may want to devote upward of 55% of their assets to fixed-income securities, younger investors should still aim for a roughly 10% allocation. Likewise, commodities should be kept to a small portion of anyone's portfolio, ideally no more than 5%-10%. But from today's vantage point, you've got to be ready to own these asset classes for the long run, because they're not cheap by any means. Uncertainty is high right now and we'll all be waiting with bated breath to see how things shake out overseas -- so make sure you're ready for both the near-term possibilities and the long-term opportunities.