- A 60-40 investment portfolio (60% stocks to 40% bonds) that was highly recommended 10 years ago – is quickly losing importance. Here’s why:
- Equity markets today are at record high levels with a probability of a major correction high.
- Bonds pay next to nothing and in some cases provide negative yields.
- Cash has no return and is less than inflation.
- Investors face a dilemma on how to generate safe returns that beat inflation today.
- Below we talk about some alternate methodologies you can use.
Bonus: At the end and I’ll show you my personal strategies to generate high income + growth with low risk in today’s overvalued markets.
What are the implications?
- Investors will need to take on more risks to meet their long-term needs.
- “I would bet a meaningful number of people allocated to a 60-40 portfolio should be in a higher risk profile to meet their long-term needs,” said Jim McDonald, chief investment strategist at Northern Trust.
- Loading up on stocks wouldn’t be smart for investors in or near retirement, who need income and don’t have the benefit of time as most investors would not be able to handle the volatility of an all-stock portfolio.
How should a portfolio be structured?
- To generate higher returns a lot of investment managers are moving to alternative assets, where fees can be higher, strategies can be more complex and not all investors qualify for entry.
- Skancke, chief economic adviser at Keel Point said a typical 60-40 portfolio today should be adjusted to hold 20% traditional fixed income, 15% diversified alternatives and 5% cash on the fixed-income side. The equity side, he said, should be made up of 25% to 30% U.S. equities, 15% to 20% international equities, and 15% alternatives.
What are alternative assets comprised of?
- Investing in alternative assets often requires buyers to lock up their money for five, maybe 10 years. During that time, investors may not see any money distributed.
- Liquidity is also an issue as fund managers can’t easily buy or sell holdings like managers in traditional markets, so investors can’t easily tap those assets when they want.
- Many types of alternative asset classes aren’t correlated with stocks and are expected to perform best when equity returns are flat or down.
- Here are some common alternative investment types:
- Private equity.
- Venture capital.
- Private debt.
- Hedge funds.
- Real estate.
What are the problems with alternate investments?
- Alternative investments and hedge funds involve a high degree of risk and can be illiquid due to restrictions on transfer and the lack of a secondary trading market.
- They can be highly leveraged, speculative, and volatile, and an investor could lose all or a substantial amount of investment.
What is a retiree to do?
- I don’t use any alternative investments in my personal portfolio.
- I follow a bucket strategy in my personal income portfolio which has been working well.
- Bucket 1 – Cash for year 1 expenses (5%) Bucket 2 – Safe income funds for year 2 (5%) and Bucket 3 – High yield monthly income funds with downside protection, and low fees (they do exist!).
- All the details can be found here: