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We all know how painful 2022 was for investors. To put it in perspective, conservative balanced portfolios with 60% in equities and 40% in fixed income were down almost 20%. The more aggressive, all-equity growth portfolios were down over 30%. Even 20-year treasury bonds lost 30% in 2022.
This carnage was caused primarily by the Federal Reserve raising interest rates seven times last year, though the war in Ukraine and China’s restrictive COVID policy did not help. After such a horrible year, what do you do with your money? How investors position themselves from a risk perspective is vitally important; one way to do this is through proper asset allocation strategies.
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According to Investopedia, “asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.” Investors must ask themselves how they would feel about losses of 30% versus gains of 30%. Is it more comfortable psychologically not to lose that much money on paper in a bear market or miss out on major upside during a bull market? If the answer is “I would rather not lose 30%, ” then you may want to add more defense to your portfolios through diversification. Typically, this is done with bonds, cash, or alternative investments. Another aspect of picking the right asset allocation strategies is whether income is important. If it isn’t, then a total return approach is another way to invest. The third option would be a balance of the two.
Asset Allocation Strategies: Income Investing Approach
For some investors, buying stocks and bonds for income feels better than just investing for growth, in principle. At least your portfolio is generating positive cash flow. After a year like 2022, this makes perfect sense. However, from 2019 to the end of 2021, you would have missed out on a lot of upsides when growth stocks were up double-digits.
The good news for income investors today is bonds offer much higher yields than just a year ago. In fact, you can get almost 5% on a 6-month treasury bill. With the 20% correction in stocks last year, companies’ dividend yields are higher too. Alternative investments may even pay 6-8% in distributions. With the uncertainty surrounding inflation and the possible moves by the Federal Reserve, if you can get paid 3-5% in income from dividends, interest on bonds, or distributions from alternative investments, that might be a safer way to go after last year’s carnage and nowhere-to-hide mentality.
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Growth Approach
Another approach to investing is to buy investments strictly for growth. This was a very successful investment strategy for many years until last year. In the low-interest rate environment from 2008 to 2021, companies with no dividends and strong sales did extraordinarily well. The largest technology stocks were the obvious winners, but cryptocurrencies and real estate took off too. The mindset was to buy riskier assets because inflation didn’t exist, and with yields near zero on bonds and money market funds, you were losing money on your cash. In a higher inflation and rising interest rate environment, riskier assets get sold, and investors gravitate toward safer investments. We saw this in 2022.
Balanced Approach
When it is difficult to decide between an income or growth approach, then a great alternative is a combination of the two. This simply means having 60% of your portfolio invested in stocks and 40% invested in bonds, alternatives, and cash. This strategy worked great from 2019-2021 but did not work in 2022 because of the massive increase in interest rates and the selloff in bonds. Now that the bond market has recalibrated and yields are so much higher, today is a much better entry point to build a balanced portfolio. You may be able to get a 3-4% cash flow stream with good diversification and less volatility, too.
The Bottom Line
Investing isn’t easy, particularly after a year like 2022, but as our Chief Investment Officer, Michael Dow likes to say, “volatility is the price we pay for long-term wealth creation in the markets.” It is time in the market that counts, not timing the market. Nobody can perfectly time the market. In fact, if you miss the best five trading days of the year, you will make significantly less money over the long term. However, having said that, you also need to sleep at night with asset allocation strategies that allows you to do that. If you get that piece of the puzzle right, hopefully, you’ll be able to retire comfortably down the road.
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Frederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results.
The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.