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Taken together, stocks and bonds have never, in over 100 years of history, been as expensive as they are today. If it is true, as Warren Buffett says, that “the price you pay determines your rate of return” then investors paying the highest price on record for financial assets are very likely standing at the brink of the worst returns in history. That’s the bad news…

…but here’s the good news: At the same time, real assets (commodities, real estate and collectibles) have never been cheaper relative to financial assets than they are today. Thus, relative returns here could be some of the best on record over the coming years.

Because real estate and collectibles have actually performed very well over the last few years, the message is even more dramatic when you isolate the commodities-to-stocks ratio.

Beyond valuations there is also compelling macro case to be made for favoring real assets over financial ones going forward. Demographics trends, which have supported the latter for the past 35 years or so, are now shifting to headwinds, which are supportive of the former.

My point is not that you should go out and sell all of your stocks and bonds and put the funds into commodities. But most investors own some sort of spin on a 60/40 portfolio that neglects real assets altogether.

In contrast, every one of the most successful assets allocators in the business maintains significant exposure to real assets at all times, whether it be real estate, gold, TIPS or commodities.

Considering all of the above, there is a compelling case to be made that value-conscious investors should now overweight real assets. And focusing entirely on financial assets to the exclusion of real ones could prove to be a very painful mistake.

PS – No, Bitcoin doesn’t count as a “real asset.”