By Paul R. La Monica, CNN Business
(CNN) — If you’re nearing retirement age…or if you’re just a super conservative investor terrified of risky investments that can lose money…then you’ve probably heard that you should have a 60/40 portfolio.
This means 60% in stocks, which historically increase over time, and 40% in bonds, which provide stable income and more security.
But is the equation an anachronism at a time when interest rates and bond yields remain historically low despite a recent round of rate hikes by the Federal Reserve?
Look what is happening this year.
Despite a recent rally, bonds and stocks sold off. The S&P 500 fell more than 11% while the iShares 20+ Year Treasury Bond ETF, a popular fund for bond investors, plunged 22%.
“We encourage investors to look for investments that don’t trade like anything they own,” said Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund, in a report.
Some experts also think investors should consider becoming more aggressive and buying more stocks.
After all, many blue-chip stocks pay dividends, and not just utility companies and run-of-the-mill real estate companies. Apple and Microsoft offer regular (and growing) dividends, for example.
“Bond investors are expecting a slowing economy, but equity investors are still looking for decent earnings. Some companies have pricing power and stocks that generate income,” said Wayne Wicker, chief financial officer. investments at MissionSquare Retirement.
“A 60-40 portfolio is not properly positioned in times like these when inflation is higher than bond yields,” he added.
Bonds remain an excellent source of income and diversification
Still, there’s probably a case for certain bonds in a retirement portfolio. The 10-year Treasury yield is hovering around 2.8%, well above the 1.5% level where it ended 2021. Long-term bond yields should continue to climb if the Fed continues to raise the short term rate.
“We believe the 60/40 portfolio will continue to be an effective strategy for investors, and reports of the death of the 60/40 portfolio are greatly exaggerated,” said Douglas Beath, global investment strategist at Wells Fargo Investment. Institute, in a recent report.
Beath noted that while this strategy didn’t work in 2022, a mix of stocks and bonds tends to perform well in most periods and bonds “provided significant hedging during these periods of market volatility. stock markets”.
In this sense, a 60/40 portfolio should be able to generate annualized returns of around 7%, according to Vanguard.
“Periodically, experts declare the death of the portfolio composed of 60% stocks and 40% bonds. Their voice has become louder lately, in the context of a sharp drop in stock and bond prices said Roger Aliaga-Díaz, chief economist for the Americas and head of portfolio construction for Vanguard, in a report last month.
Allaga-Diaz conceded that the best portfolio composition depends on your age and risk tolerance.
For younger investors, an 80/20 or even 90/10 stock-bond combination might be best. But for those close to retirement, a 30/70 split may be more appropriate. Either way, there should be bonds and stocks.
“We’ve been here before. Based on history, balanced portfolios have the potential to prove the naysayers wrong, once again,” he added in the report, titled “As the phoenix, the 60/40 portfolio will rise again”.
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