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Tag: Investing strategies

4 Key Asset Allocation Strategies for 2023

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.

READ — 7 Crucial Investment Strategies for 2023

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.

READ — 5 Ways Small Business Owners in Colorado Can Survive Inflation

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.

READ — Mapping Out Financial Success with Retirement Planning

 

Thumbnail Fred Taylor HeadshotFrederick 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.

7 Investment Strategies for 2023

In 1992 Queen Elizabeth was famous for saying “annus horribilis” when three of her four children’s marriages dissolved and Windsor Castle caught fire – a horrible year. The same could be said about 2022 for investors and investment strategies. A portfolio invested 60% in stocks and 40% in bonds was down double digits, one of the worst years for these types of balanced accounts since the 1930s. Investors lost more money in the iShares 20+ Year Treasury Bond ETF than the S&P 500 Equity Index. This is an extremely rare phenomenon; investors, and their typical investment strategies, typically don’t lose more money in bonds during equity bear markets.

With the Federal Reserve aggressively raising short-term interest rates since March, there has been nowhere to hide in either the stock or bond markets. Wall Street analysts recently readjusted their FED Funds estimates higher. It appears short-term interest rates are headed to 5% by the end of the first quarter of 2023. So, with this as a backdrop, how do maximize your investment strategies in the new year?

READ — Finding the Silver Lining Amidst Rising Interest and Inflation Rates

Time is on Your Side

There is an old adage: It is time in the market that makes you money, not timing the market. This is particularly relevant in the case of 401(k) and IRA accounts. If you are five or more years away from retirement, you can afford to have a higher allocation to stocks than bonds, and quite frankly, you should. One way to take advantage of the current bear market is to dollar cost average by adding more equities in your 401(k)s with every paycheck or to your IRAs annually. If you choose this option, be sure to set up a dividend reinvestment plan. If the markets continue to get cheaper, at least you are adding additional shares at lower prices. Eventually, when the markets turn around, you will have added to your equity holdings during a tough bear market.

Diversification May Work Better Next Year

This is the first year in three decades where diversification did not work. You lost less money in the S&P 500 ETF than in a 60/40 balanced account comprising stocks and bonds. Bonds normally act as an effective hedge against a weak stock market or financial crisis; however, in 2022, bonds were hurt by rising interest rates.

There could be good news though for 2023. After all these rate increases, and with treasury bills yielding 4% (a year ago, they were zero), the odds of bonds producing positive returns next year have improved dramatically. With the yield curve being inverted, you can take less duration/interest rate risk because short-term treasuries pay more in interest than 10 and 30-year treasury bonds today. Once the Federal Reserve stops raising rates, you can buy longer-term bonds and lock in rates, but until that happens, there is no reason to add interest rates or credit risk to your bond portfolios.

READ — Does an Inverted Yield Curve Portend a Recession?

Maximize Retirement Account Contributions

Bear markets are the best time to optimize your investment strategies and invest the maximum you can. Try to put 10%-12% of your paycheck into your 401(k) every month. Not only is it a great way to save money, but it lowers the amount you get taxed from paycheck to paycheck. For example, if you make $100,000 a year and put $10,000 into your 401(k), you will only get taxed on $90,000, not the full $100,000 – A win-win. If you haven’t opened a Roth IRA or regular IRA yet, now is a great time to do so. Next year you can contribute an extra $500. If you are over 50, you can contribute $7,500 in 2023.

Pay Off Debt

If you have cash earning close to zero in a checking or savings account at a bank, use this extra cash to pay off high-interest credit card balances. If possible, it is best to avoid paying double-digit interest rates. Additionally, if you have any adjustable-rate loans, like a home equity line or an auto loan, you could see a considerable increase in your monthly payments if your loans are set to readjust higher. If you have student loan debt above 6%, it may be best to pay that off too.

Buy Dividend-Paying Stocks

Technology and other riskier stocks were great investments when interest rates and inflation were low, but now that has changed. With massive inflation and interest rates up 4% in 2022, these stocks are down twice as much as dividend-paying stocks. The market is now favoring companies that pay dividends, and more importantly, have the cash to increase their dividends annually. If we have a recession in 2023, defensive sectors such as healthcare, energy, and consumer staples will be a safer place to focus your investment strategies until conditions improve.

Buy Short-Term Bonds vs. Cash

For the first time in 14 years, you can get paid 4% on your cash if you invest in treasury bills that mature in less than one year. You buy them at a discount, and when they mature, you get all of your principal back. For example, if you invest $10,000, you only pay $9,900; six months later, you get your $10,000 back with a $1,000 gain (yield or interest earned/accrued).

Buy I-Bonds-Savings Bonds

These savings bonds offer a very attractive interest rate of 6.89% until April 2023. However, there are two things you need to know: 1) you can only buy them in $10,000 increments per family member, and 2) you can only buy them directly from the U.S. government on their website.

The Bottom Line

No question about it: 2022 was a challenging year to be a conservative investor. As Winston Churchill was famous for saying during the start of World War II, “Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” The same could be said for the Federal Reserve’s mission to bring down inflation by raising short-term interest rates. If inflation continues to come down next year, they can stop hiking interest rates. Once this happens, investors may feel more comfortable investing in bonds with higher yields and stocks with lower price-earnings ratios. Wouldn’t that be a nice change in 2023?

 

 

Thumbnail Fred Taylor Headshot CurrentFrederick 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.

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. Beacon Pointe provides links for your convenience to other providers’ websites. Beacon Pointe is not responsible for errors or omissions in the material on third-party websites and does not necessarily approve or endorse the information provided.