For a lot of investors today, especially if you are near or in retirement, the stock and bond markets present more risk than we have seen for over a decade. Conventional wisdom says you don’t need anything more complicated than a 60/40 portfolio. Take a look at some quotes I pulled From the WSJ:
“Investment advisers and managers usually recommend some variant of 60% stocks and 40% bonds (with fewer stocks and more bonds as you get older). The portfolio should be rebalanced at least once a year—selling some of what has done well to buy more of what has done poorly, restoring the target proportions.
The theory is that when stocks do badly bonds will do well, and vice versa. But the theory is flawed.
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Historically, this portfolio has only succeeded when stocks, or bonds, or both, have been reasonably valued or cheap. In the past, if you had invested in this portfolio when stocks and bonds were both overvalued, it proved a very poor deal.
Using data on stock and bond returns from New York University’s Stern School of Business and inflation data from the Labor Department, I looked at how such a portfolio performed in the past when measured in real, inflation-adjusted dollars.
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It lost a third of its value from 1928 to 1932, and it lost value over two longer periods as well, from 1936 to 1947 and from 1968 to 1982—even before deducting taxes and costs. In reality, most investors would have done very badly indeed.”
If you were in or near retirement in any of those time periods above and needed to use your money to live on, odds are you would have run out of money. Another theory that doesn’t hold up when subjected to real data. I believe we may be at a similar point in time right now, especially in the bond market. It looks like we may finally see interests rates starting to go up after almost a decade of decline, and that is not good news for bond investors. What traditionally investors considered their ‘conservative’ investments - bonds – actually may have much higher risk right now compared to their stocks and stock fund investments. The stock market did great in 2013. The S&P 500 was up over 25% for the year. But what has not been publicized much at all is that the bond market index, the AGG, LOST over -4% in 2013. Add some fund and management fees into that and many bond investors may have lost more like -5%. That came with just a minimal interest rate increase in 2013. When interest rates go down, bond prices go up, but when interest rates are going UP, bond prices go DOWN. If you think rates will continue to rise and you own bonds in your portfolio or 401k, you have a real problem.
So what are your alternatives? How about expanding your investment universe to include domestic equities, international equities, inverse equities, currencies, commodities, real estate, fixed income, and the safety of cash/insured money market accounts. Beyond that, how about implementing a disciplined risk management process to oversee all of your market holdings and the amount you should invest in each of the areas of your universe. The good news is that there are great ideas out there beyond a buy-and-hold 60/40 portfolio.
Cheers,
Ed Downey
Edward F. Downey is a registered investment adviser. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Viewers or readers of the information contained on this website, in any articles herein or links to other articles, or posted on any blog or social media site, should be aware that any action taken by the viewer/reader based on this information is taken at their own risk. Any concepts presented herein or links to other articles are hypothetical in nature and intended for educational purposes only. This information does not address individual situations and should not be construed or viewed as any type of individual or group recommendation. Be sure to first consult with a qualified financial adviser, tax professional, and/or legal counsel before implementing any securities, investments, insurance products, or investment strategies discussed herein.
