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Is the economy slowing down? How will rising interest rates impact my finances? Is a recession around the corner? Scroll through any newsfeed and you’ll hear these unsettling questions. And while the headlines can be alarming, we remind our clients of the benefits of staying calm, cool, and collected—keeping their eyes off the headlines and focused on the end goals we have set up for them. 

Stay Invested

Some of the costliest mistakes investors make come down to one thing and one thing only…their emotions! If you have a sound investment strategy, there’s no reason to “jump ship” in a downturn. This is called panic selling. Panic-selling is when you sell your assets when values are down to try and avoid further loss, with the intention of “jumping back in” when the market has recovered. The thing is, though, that we never know when or where the bottom is, nor do we know when it will recover.

Remember Big Dips Can Precede Large Surges

And, because the market has some of its best days right after some of its worst, most investors miss out on the recovery and end up re-buying similar assets at a higher price—plus the liability on tax events they may have triggered by liquidating their assets. Just consider those who sold at the bottom of the March 2020 COVID-induced drop and missed out on the miraculous, V-shaped recovery we saw over the next two years.  If fear prompts you to sell, you could miss the upside.

Take Your Eyes (and Ears) Off the Market

Where focus goes, energy flows. The more you buy into the headlines, the more emotionally affected you may be by them. But no matter how diligently we watch the headlines, none of us can control what will happen with the stock market. So, if you feel the noise in the media tempting you to make a financial move you might regret, just tune out the noise. And of course, connect with your financial advisor to discuss your concerns. This is often all that is needed to restore a sense of peace and confidence in the financial plan.

Focus on What You Can Control

There are some aspects of our financial lives that we can control with our actions, and others we cannot. As discussed earlier, we can’t predict market volatility – and we certainly can’t control it – but we can understand that its disruptions are temporary and won’t result in permanent loss. As long as your advisor is re-balancing and speaking with you about how they are handling your portfolio during the downturn, it’s unlikely there is much needed from you—except, of course, your trust in the process, the plan, and the long-term goals your advisor set up for you.

Lean on the Help of Your Financial Advisor

Your financial advisor is here to help you with more than just investment management, tax planning, and retirement planning. We are here to help you stay even-keeled and level-headed when major and minor events threaten your cool. Of course, we update, re-balance, and diversify your portfolio ongoing to make sure you stay on track to reach your goals, but if a market downturn has you worried, we’d be happy to go over your financial plans with you at any time.

Remember, the market moves up and down daily. Market downturns (and upswings) are par for the investing course. We’re here to help you make the most of each situation to maximize your returns long-term.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

For over seven decades, the 60/40 portfolio allocation has been the stalwart strategy of retirement planners with a high degree of success until recently. More recently, the tried and true portfolio mix has come under pressure, mounting uncharacteristic losses that may indicate it has lost its luster. What has changed for the 60/40 allocation, and has it become too risky?

Background on the 60/40 Allocation

The 60/40 portfolio has been around for more than 70 years, but it was popularized by Vanguard founder and investing great John Bogle. The research and data available at the time showed it to be an optimal allocation using stocks to drive returns and bonds to provide ballast during volatile markets. It was considered a balanced portfolio that could achieve growth while minimizing volatility and downside risk. A 60/40 portfolio regularly outperformed all stock or all bond portfolios.

It worked because, during most of that period, stocks and bonds had a low correlation with one another. When stocks were performing well, bonds were underperforming, and vice versa. But in 2021, that equilibrium suddenly changed. In the final quarter of 2021 through the current month, stocks and bonds became highly correlated, with both performing poorly. Instead of a portfolio where bonds are tempering the slumping returns of stocks, they have now become an additional drag on it. That’s not what investors sign up for with a 60/40 portfolio allocation.

It’s important to understand that the 60/40 rule was established long ago under different economic and market conditions. It performed exceptionally well over the last several decades because it was a time of historic gains in the bond market. That’s because interest rates had been in a sustained decline since the 1980s. Not anymore.

That was Then. This is Now

With the recent surge in inflation, the likes we haven’t seen in more than 40 years, the conditions for bonds have changed to the detriment of 60/40. To cool inflation, interest rates must rise. When interest rates rise, bond prices fall, which they have been doing for most of this year. Interest rates will continue to climb depending on how long and high inflation will run, making it difficult for bonds to fulfill their role as a defensive hedge.

If you believe the experts, investors in a 60/40 portfolio should downsize their return expectations over the next decade. Vanguard forecasts a relatively low median annual return of less than 4% through 2031. That’s well below the 7% annual return target of a 60/40 portfolio, primarily due to declining bond prices. 

Is it Time to Consider Total Return Alternatives?

If high inflation persists, investors now have to worry about the possibility of negative returns on their investments. For some investors, especially those with longer time horizons, it may be time to change the allocation rule with less emphasis on bonds and more emphasis on total returns. Several bond alternatives provide diversification while enhancing total return opportunities.

Utility stocks: Utility stocks act similarly to bonds because they offer high yields and relative safety. Some of the better utility stocks have a record of steady earnings and dividend growth. While utility stock prices can be sensitive to rising interest rates like bonds, they offer higher total return potential. 

High-quality dividend-paying stocks: High-quality companies with a long history of paying annual dividends and increasing them over time are a reliable source of income. They also tend to be less volatile than the rest of the stock market, making them a great diversifier. The dividend acts as a cushion against declining share prices. 

Real estate investment trusts (REITs): REITs are professionally managed real estate portfolios that hold up well in an inflationary environment. Many are required to pay out up to 90 percent of their earnings as dividends, making them a reliable income source. 

Though it may not be entirely over for the venerable 60/40 portfolio allocation, it may be a while before it recaptures its magic, which calls for some rule adjustments in the meantime. The adjustments don’t have to be radical—perhaps moving from a 60/40 stock and bond allocation to a 60/20/20 stock, bond, utility stock, high-quality dividend stock allocation, or some combination of all the above. 

However, any changes to a long-term investment strategy should always be made in consultation with an investment advisor with the expertise and tools to help you assess your circumstances and create an allocation consistent with your investment objectives, time horizon, and risk profile.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand-alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.