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Why the standard 60% stock / 40% bond portfolio is in decline

By using just the two asset classes listed above, investors can put together one of the most common, all purpose allocation portfolios consisting of 60% stocks and 40% bonds. For decades, it has the recommended allocation for just about any age group. But, like the “4% withdrawal” rule of thumb, even these tried-and-true strategies may not be as relevant as they once were.

For the past few years, investors have experienced very unusual situations that have left them looking for new investment strategies and new asset allocation mixes. Three factors that have reduced the effectiveness of a 60/40 allocation are:

  • Low bond yields and low stock dividends.
  • During significant downtrends, such as the recession of 2008 and 2009, bonds and stocks both move down together (a strong correlation).
  • Volatility in the marketplace with no clear market direction.

It has even been suggested that 60/40 portfolio has 80% of the volatility of a 100% stock portfolio. That comes as a shock to many investors who thought they were more diversified than they really were.

Contact us for a free consultation to help you build your asset allocation


Four Popular Asset Allocation Strategies

There are four ways to determine an appropriate asset allocation.  Each one with pros and cons.

  • Rule-of-thumb formulas. These are useful for quick planning purposes.  For an investor, this should be a starting point to see if their current allocation is in the ballpark.
  • Risk Tolerance. Investors can complete questionnaires which can identify how comfortable they feel about volatility in their portfolio.  The questions identify how the investor would feel if they were to see their account value decline by X% over various time frames.  Based on their answers, a portfolio is designed around their risk profile.  This is an objective data driven solution, which many find appealing. Unfortunately, an investor’s risk profile is not static. It changes day to day, depending on life experiences, the news, and a variety of other factors.  When the economy has a negative outlook, an investor’s appetite for risk is usually much lower than when the economy is bullish.
  • Stage of Life.  Age-based asset allocations that adjust over time have grown in popularity.  The premise is simple; as an investor gets closer to retirement, their allocation shifts to more conservative asset classes.  This can help avoid periods of extreme market volatility right before entering retirement.  The downside? this approach does not factor in personal considerations such as risk tolerance, longevity or financial goals.
  • Goal based. At times, we have built portfolios around a client’s financial goal, such as having $500,000 in assets by the time they retire.  We can show the client the risk profile they would take on if they wanted to try to reach that goal.  This is often used to spark conversation with the client about other factors that should be explored, such as increasing the savings rate or lowering the goal.

Bottom line, there is no single solution on how to arrive at an appropriate asset allocation.  A combination of some or all may be appropriate.  Maybe an investor uses the Stage of Life Approach and tilts it more aggressive or conservative depending on their specific risk tolerance.

Contact us for a free consultation to help you build your asset allocation.

Planning for Retirement is Simple.

When it comes to retirement planning, there are only two outcomes.  You will either outlive your savings or your savings will outlive you.  It’s that simple.  Unfortunately, it’s not easy.  Below are a few strategies to consider during your transition years.

50s and 60s: Plan for the Future

Around age 50, investors should begin to plan more specifically for their retirement. It’s important for investors to remember that even though they are approaching retirement, they should still maintain a strong holding of stocks.  An investor will retire and may not touch some of their assets for a few decades. Those funds should be invested a little more aggressively than the funds they will need early in retirement.

Retirement Transition: Writing the Next Chapter

As an investor enters retirement, they transition from acquiring assets and saving to spending.  The asset allocation should not have a sudden change.  Rather, a phased approach can offer a smooth transition into retirement. We work with clients to solve this dilemma by using a bucketing strategy.  In a sense, investors split their portfolio in four buckets, with each bucket designed to provide income for 7 to 8 years at a time, and focused on using an appropriate asset allocation for each bucket based on the timeframe.

Age 70+: Staying Prepared

It used to be that the average American male had reached his life expectancy by age 65. In fact, when Social Security first started, it was designed to help people that had lived longer than the life expectancy at the time (age 65). Now, with changing retirement trends, many people are still working at age 70 and beyond.  Not to mention living longer… a lot longer.

If an investor is healthy and there is longevity in the family history, it’s important to review the portfolio to make sure it is not being depleted early.  If the investor is unhealthy, or does not expect to live much longer, it’s important to check that beneficiaries are up to date or develop a strategy for gifting the account to a loved one.

Could another recession occur? What’s being done to prevent the next one?

Five years ago, the United States was rocked by yet another financial disaster – the collapse of Lehman Bros. This came on the heels of a tightening credit market, the housing crunch, struggling auto industry, and numerous large financial institutions that were on the brink of collapse.

Could it happen again? What’s been put in place to prevent another recession from occurring?

Some progress has been made, but not enough. The culprits are not unusual:

Red tape: Financial Regulation reform, known as the Dodd-Frank Financial Reform was designed to usher in a new era of regulation, prevent the Madoff schemes, limit the questionable investment products (mortgage backed securities), and ultimately stop corruption and abuses (which led in part to the recession of 2008 and 2009). It had the best of intentions!

In reality, this legislation has aggravated an already burdened financial system. There has been little or no reform, just more regulation and paperwork. Does it help the investor? Not yet. In fact, this legislation has provided few additional protections to investors.

Bureaucracy: The politics in government have gotten in the way of meaningful reform. Gridlock has slowed the process. The hot issue are health care reform and improving the economy NOT minimizing future recessions.

Uncoordinated Reform and Enforcement: There are numerous government agencies and stakeholders that are looking to better protect consumers. Unfortunately, it’s not always clear which organization is responsible for what area, which leads to overlapping regulations and confusion for investors. This isn’t just a US problem, it’s on a global scale!

Lack of Leadership: There is no organization that is looking at the whole picture. Each regulator has it’s piece, but who is looking at the big picture? Who is making sure that nothing is being missed? Is it ever possible?

Preventing another disaster is a very complicated issue that can’t be solved overnight. Reform to this magnitude can’t be judged as a failure just yet. It needs a thoughtful approach, not a knee-jerk reaction. An over-reaction could lead to over-regulation and that can be almost as dangerous as a lack of regulation. The right balance needs to be developed.

We are on the right path. A path that will ultimately help the investor, but the path is long and we’ve only just started. The headwinds we face will probably be overcome, we just don’t know when.

We will always have to worry about recessions. Hopefully, we will eventually have something in place that will protect investors from events that led to the recession of 2008 and 2009.


Why you should be skeptical of Europe’s economy, even though its recession is over.

This summer, headlines stated that the Euro Zone had emerged from its recession with .3% growth in GDP. It’s no cause for celebration, but an important signal that Europe is making progress in its recovery. Below are a few signs indicating Europe is improving:

  • Manufacturing growth has improved in five countries, including Italy and Ireland.
  • New orders and new exports have not been this high since May 2011
  • Euro zone manufacturing purchasing managers index reached a 26-month high (highest since June 2011).
  • Greece continues to lag relative to other European countries, but even it has hit a four year manufacturing high!
  • Air freight is at the highest level since 2011.

What we are still waiting to see:

  • This growth has not translated into new jobs… yet. Unemployment is still around 11% for all of Europe. (Austria has the lowest rate, 4.7% and Spain has the highest rate, 26.9%)
  • National public debt in Europe has hit new highs this year.
  • Germany and France are largely responsible for the improved economic situation, which masks the recovery efforts of the weaker economies (or lack of recovery).

We do not expect to see the economy come roaring back any time soon. The end of the recession is an important milestone to reach, but just a milestone. We feel that Europe’s economy will slowly improve for many months and struggle to overcome obstacles to meaningful growth.


Stocks, Value, and the Economy.

There has been a historic intervention into the economy by the central government. Huge deficits were incurred. The U.S. Treasury and its partner, the Federal Reserve engaged in massive money-creation, buying (QE) all this debt. Essentially, the government loaned itself money; as much as it wanted and more. Interest rates collapsed to never seen before levels (0%). We were told this would find its way into the real economy and economic prosperity would return. So far, it has not. The financial sector and their cabal have benefited from this debt/financed binge of cash flowing to them but high unemployment remains and wages are downs. Trickle-down economics has yet to take hold this time. Clearly, the economic backdrop is not good.

Yet the U.S. Stock market is up. Reasons vary. Government deficit spending has replaced the tapped out consumer’s borrow & spend binge. This has maintained corporate revenues. Lower than low interest rates allowed corporations to refinance debt and add to earnings. The central banks newly created money has flowed into the stock market; boosting prices.

However, up is up. Although valuations are rich (link), especially given the economic backdrop, they may not be in bubble territory. Lazlo Birinyi still firmly holds that the time-proven rhythm of the U.S. stock market points up. And this is America. Great technological strides are being made; such as Apple’s harnessing and slick packaging of personal digital devices, Ford’s remarkable progress manufacturing fuel-efficient EcoBoost engines, the dramatic reduction of electricity used by LED lighting, or direction drilling reducing carbon emissions and making us energy independent to name a few.

Therefore, as we go into the Fall, U.S. growth stock funds are up about 16.0%, but emerging market funds are down about 13%, Intermediate-term bond funds are down about 4.0%, and money market funds pay next to nothing. This leaves a diversified portfolio up maybe about 6.0%. This is a respectable return, but not what the headlines lead the average investor to believe.

Now, all eyes are on what our government will do with interest rates (QE and its tapering) and how this grand experiment will end.

Any benefits to exploring space? The answer surprised me.

Over the weekend, I visited the space shuttle on display in NYC.

I was surprised to learn all the technology developed for space exploration that has found ways into our everyday lives.  Here are just a few:

  • Cell phone camera
  • Clean energy technologies
  • Scratch-resistant lenses
  • Water filtration & purification
  • CAT Scans
  • Invisible braces
  • Memory foam (pillows)
  • Ear thermometer
  • Smoke detector

Maybe someday there will be a huge benefit (life on another planet, colonizing Mars), but until then, these “small” technological advancement can bring value to people today. It can make our lives better, safer, or healthier.

Links to read more:

here and here