Would you believe us if we told you we haven’t seen this type of investing market in 40 years? As surprising as it may sound, it’s just the reality of what we’re experiencing in our economy today.
Not only is inflation at forty-year highs, but the equity and bond markets are taking a hit. Stocks closed out their first losing quarter in two years and bonds haven’t been faring so well, either. The Bloomberg US Aggregate bond index, which is made up of US Treasurys, corporate bonds, and mortgage-backed securities (MBS) lost 6% for Q1 2022.
Much of this can be attributed to uncertainty regarding Fed rate hikes, the war in Ukraine, and now a pending lockdown in China that could cause more supply chain issues than we’ve already seen as a result of Covid. But, the result can have significant impact on your portfolio.
What is Happening in Today’s Market?
1) Inflation is surging and eroding purchasing power, also catalyzing the Fed to take a more hawkish stand on monetary policy with three to four interest rate hikes projected for this year alone.
2) Growth stocks are down. Tech has gotten slaughtered, with no support on the bond side.
3) Commodities and consumer staples are making a comeback. These assets are typically flat or depressed in a non-inflationary environment. Now, it may make sense to hold 18-22% in commodities.
In other words, things have shifted significantly in the market. A winning portfolio even two years ago could be very, very risky today. Let’s take the long-venerated “safe” 60/40 portfolio as a prime example.
Inflation and Rising Interest Rates are a Problem for 60/40 Portfolios
For decades, investors have poured trillions of dollars into the 60/40 portfolio mix. The thinking behind it is that 60% invested in stocks drive the returns while 40% invested in bonds provide the ballast during volatile markets, with both assets forming the core building blocks of a long-term portfolio.
Despite ongoing predictions of the decline of 60/40, for much of the last several decades, the strategy of investing 60% in stocks and 40% in bonds has held up well, generating positive returns in 11 of the last 12 years.
The prospect of higher interest rates makes it difficult for bonds to carry their role as a defensive hedge. And, with bonds yielding less than the inflation rate, investors will likely abandon high-quality bonds for high-yield bonds, further driving down bond prices. With the stock market teetering on the high valuations of U.S. large-cap stocks, equity investors may also be looking at prolonged mediocre investment performance.
This could be the end of the road for the “tried and true” 60/40 asset allocation mix. At least for now.
You’ve Changed, Too
Changes in the economy aren’t the only things affecting the health of your portfolio. Believe it or not, you have, too.
1) Your Age: Forty years ago, you were probably just starting out in your career, earning less and starting with a smaller balance sheet in your portfolio.
2) Your Net Worth: Now, you’ve likely amassed a good deal of wealth in your portfolio.
3) Your Risk Tolerance Level: With more money invested in the market, you’ve got a lot more you stand to lose.
The Stakes are Higher Now
This type of market with high inflation and rising interest rates may not have had much of an impact on you forty years ago when you only had $20k in blue chips in your retirement account. But with 7 figures in your portfolio, the stakes are a lot higher.
The decisions you make in today’s market will have far greater impact on your portfolio. The bigger the tree, the harder they fall.
“Doing Nothing” is Not an Option
What do most people do when they don’t know what to do? Nothing. In some cases, this can be beneficial. Not every investment opportunity needs to be taken.
But in situations like these, where market conditions have turned perfectly safe portfolios into risky ones, moves must be made in diversification and asset allocation to take advantage of the market’s current potential and to mitigate risk.
If you are unsure how risky your portfolio is in this environment, or are looking to partner with a financial advisor who will update your portfolio as market conditions fluctuate, we encourage you to reach out for a complimentary Discovery Call.
At Trivium Point, we specialize in comprehensive wealth management and accounting services for business owners both in New York and throughout the country. Our goal is to keep you on track to build the future you imagine no matter what the market conditions look like.