Asset allocation today

As a retiree what are you supposed to do with your money, especially these days?

Former “Bond King “ Bill Gross, who spent most of his career building PIMCO into a fixed-income powerhouse, recently dismissed bonds as trash on his website. 

If you needed any further justification to avoid treasuries, this pronouncement from someone who has been widely viewed for years as one of the biggest bond cheerleaders might be it.  

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

These days, you may need to own more stocks for growth, but you may also need to derive income from dividend-paying stocks, since bonds are paying close to zero in interest after factoring in inflation. 

The reason for this change in approach is due to interest rates now being below the rate of inflation, leaving bonds with essentially no value. In contrast, stocks are up approximately 20 percent.  

As a retiree what are you supposed to do with your money, especially these days when it doesn’t feel great investing in either asset class in the current environment? After hitting a post-pandemic low of 18,000 in March of 2020, the Dow is currently trading at over 34,000 today. It is now difficult to feel good about buying stocks after the massive run up in prices in recent months. However, if you stay in bonds, you could be losing money because of inflation.  

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

All these things drive bond yields or interest rates down, motivating investors to take on more risk and fuel more stock buying. Low interest rates also drive-up real estate prices because houses become more affordable with cheaper mortgages. 

As counter intuitive as it sounds, investors need to look at the world a tad differently if the Federal Reserve is going 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 going to keep interest rates low, it indicates a green light to buy riskier asset classes like stocks or real estate. Today may be no exception. 

Retirees may need to look at increasing their allocation to stocks to 60% to 75% of their portfolio. One way to mitigate some equity risk is to buy dividend-paying stocks and companies that have a history of increasing their dividends every year by two to three times the rate of inflation. This way, you are earning more income than you would from bonds, and you’ll have a good hedge against rising costs or inflation. If companies can raise prices, then they can pass along dividend increase to their shareholders. 

Bonds are an important part of any investment strategy, but not necessarily for income anymore. They now play a defensive role in a portfolio, just in case stocks suffer a big correction like they did in March 2020. They can be a placeholder for cash when you need to generate income for a down payment for a home, pay for your daughter’s wedding, or purchase a car, for example. When you need cash, you can sell some of your bonds instead of stocks, particularly in a falling stock market. 

It is hard to change the old 60/40 mindset, but if you’re retired, you may need to adjust that thinking in order to sustain your lifestyle the next 30 years. There may come a time when bonds yield 5% again, but until that happens, it may be prudent to own more stocks in your portfolio than bonds.

Thumbnail Fred Taylor Headshot Current Fred Taylor is a managing director and partner of Beacon Pointe Advisors’ Denver office. He helps individuals and families build wealth, live off their wealth and leave a legacy for future generations. A former economic advisor to Governor Bill Ritter, Fred has more than 35 years of financial services experience.

Categories: Business Insights, Management & Leadership