People are constantly looking for the best way to design their investment portfolio. Do I choose new growth stocks or the older dividend stocks? Do I need to invest in bonds, and if so, do I pick high quality low yield bonds, or do I pick lower quality, higher yield “junk” bonds? How much do I invest in stocks versus bonds? There are a lot of different scenarios and for most people, it can be overwhelming.
A general rule of thumb is to invest 60% of a portfolio in stocks and the other 40% in bonds. What this was originally designed to do was allow the stocks to grow at their average of 8% per year and the bonds that were yielding 3-8% would help supplement the growth with the interest they were earning while providing more stability in the account. Someone more aggressive might want to invest more heavily in stocks, and someone more conservative would have more in bonds.
Unfortunately, the typical 60/40 portfolio as described above is not earning like it should be anymore. The 1 year treasury bill is less than 0.1% and the 10 year treasury note is around 1.3%. With returns like that, inflation is outpacing the returns. The Federal Reserve is currently targeting 2% inflation, which means returns lower than that result in a loss of buying power each and every year. Even high quality bonds aren’t acting as a hedge for inflation any more. Low quality bonds that would typically have a positive return adjusted for inflation (real return) are going to be far more volatile and too closely linked to market performance, which means they also aren’t going to provide the stability desired while investing in bonds.
Stock prices across the board are near all-time highs, meaning that if you own stocks, your portfolio has likely benefited. The growth with these stocks doesn’t come without its own headaches. Between Feb 18, 2020 and Mar 19, 2020, the market dropped over 30% due to covid. This wasn’t the first “market correction” or sharp downturn that the market has seen in the last 20 years. The dot-com bubble of the early 2000s, the economic/ housing crisis of 2007-2008, even as recently as the end of 2018 were all marked by at least a 20% drop in the stock market. Luckily, the market has recovered from these crashes, but the roller coaster is more than some people can handle, especially if they are drawing money from their portfolio each month in retirement.
Stocks are more volatile than we like to trust. High quality bonds aren’t keeping pace with inflation. The 60/40 model is not performing like was originally designed. It’s hard to trust that your retirement is secure when you can’t trust your portfolio’s performance in the good times and the bad. There is a better way to mitigate some of these risks. To learn about how to better protect your investments, give us a call and we can explain our solution to this problem.
Advisory services are offered through Foresight Wealth Management, LLC, DBA Regents Park Advisors, a Registered Investment Advisor with the SEC. Foresight Wealth Management, LLC only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission and does not imply that the advisor has achieved a particular level of skill or ability. All investment strategies have the potential for profit or loss.
