Asset allocation today – ColoradoBiz Magazine


Former “Bond King” Bill Gross, who has spent most of his career making PIMCO a fixed income powerhouse, recently dismissed bonds as garbage on his website.

If you needed some extra rationale for avoiding Treasuries, this statement from someone who has been widely regarded for years as one of the greatest bond cheerleaders could be.

Traditionally, bonds have always played some role in an investor’s portfolio. If you were retired, the old rule of thumb was to have a balanced portfolio of 60% stocks and 40% bonds. But today, it is not that simple.

These days, you may need to own more stocks to grow, but you may also need to earn income from dividend-paying stocks, as bonds earn near zero interest after you factor in the equity. inflation.

The reason for this change in approach is because interest rates are now lower than the rate of inflation, leaving bonds worthless. In contrast, stocks are up about 20%.

As a retiree, what are you supposed to do with your money, especially these days when it is not pleasant to invest in either class of asset in today’s environment? After hitting a post-pandemic low of 18,000 in March 2020, the Dow Jones is currently trading above 34,000 today. It is now difficult to feel good about buying stocks after the massive surge in prices in recent months. However, if you stay in bonds, you could lose money due to inflation.

To understand how we got to this point in the investment cycle with such difficult investment choices, we should look no further than the Federal Reserve. When external shocks hit markets like the crash of 1987, the financial crisis of 2008 or more recently the Coronavirus in 2020, the Federal Reserve used its power to lower interest rates, buy back debt and provide liquidity. massive to calm nervous investors.

All of these things lower bond yields or interest rates, motivating investors to take more risk and fueling more stock purchases. Low interest rates also push up real estate prices as homes become more affordable with cheaper mortgages.

As counterintuitive as it may sound, investors have to look at the world a little differently if the Federal Reserve is to remain so actively involved in the bond market. Consider the adage “Don’t fight the Fed,” which means that if the Federal Reserve is to keep interest rates low, it signals a green light to buy riskier asset classes like stocks or real estate. Today may be no exception.

Retirees may need to consider increasing their allocation to stocks from 60% to 75% of their portfolio. One way to mitigate some equity risk is to buy dividend paying stocks and companies that have a habit of increasing their dividends every year by two to three times the rate of inflation. This way, you earn more income than you would with bonds, and you will have good hedging against rising costs or inflation. If companies can raise their prices, then they can pass the increased dividends on to their shareholders.

Bonds are an important part of any investment strategy, but more necessarily for income. They now play a defensive role in a portfolio, just in case stocks take a big correction like in March 2020. marriage, or buying a car, for example. When you need cash, you can sell some of your bonds instead of stocks, especially in a declining stock market.

It’s hard to change the old 60/40 mindset, but if you are retired you may need to adjust this way of thinking in order to maintain your lifestyle for the next 30 years. There may come a time when bonds return 5% again, but until that happens, it may be safe to hold more stocks in your portfolio than bonds.

Fred Taylor is Managing Director and Partner in the Denver office of Beacon Pointe Advisors. It helps individuals and families to create wealth, to live off their wealth and to leave a legacy for future generations. Former economic adviser to Governor Bill Ritter, Fred has over 35 years of experience in financial services.


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