Oh, the longing for the simple days. Years ago, someone building their investments for retirement could almost blindly rely upon the 60/40 mantra. The equity positions would provide the growth and the bonds would provide not only a yield greater than inflation but a supposed shelter from stock market storms. In this gentle time, we might project an average 10% return over time from stocks and a 5% return from bonds resulting in a hypothetical 8% return annually.
The world is a bit less gentle these days and the world (and the markets) demand that we adapt… always.
In today’s environment, bonds are no longer the yield providers they once were. As of June 1st, the 10-year treasury yields 1.62%[1](a big drop from the roughly 5% yield of the mid 2000s). Not only is the yield lower but with inflation at approximately 4.2%[2], we are potentially losing money every day in the bond market.
Given this market change, if we want the same 8% return, we have to boost our equity percentage from 60% to 75% (a 25% increase). This is a big bump in risk for many and as a result our management process should change.
For many, the 60/40 could be a static allocation in passive investments. Sure, there would be up and down years, but the bonds gave you some return and protection.
In a world where bonds are giving you NO real return, with the 10-year treasury you have to get more creative (and active). By “active” I mean you not only adjust your holdings but your allocation to the market environment. If the market is stronger, like what we experienced from mid-March to the end of 2020, push for returns in equities. When the market is weaker, reduce exposure for the moment in bonds or cash. Actively balance the need for growth with the need to protect.
Does this take more effort? Absolutely, but this is your wealth we’re talking about here. Our team believes that you have to be researching and watching the market at all times to be ready for market gyrations. Whether it is a pandemic, Fed policy, new tax law, etc. change happens constantly and some might say more rapidly.
When the world changes the strong adapt. So start adapting.
[1]https://ycharts.com/indicators/10_year_treasury_rate [2]https://www.usinflationcalculator.com/inflation/current-inflation-rates/
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held Twin Gryphon Advisors, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.
Investment advisory services offered through Twin Gryphon Advisors, LLC, a registered investment advisor.
The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market