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The Sky Is Falling – Or Not Thumbnail

The Sky Is Falling – Or Not

In last week’s newsletter, I referenced two articles from The Wall Street Journal that implied the traditional 60/40 portfolio is broken.

One columnist penned . . .  “Building a nest egg by rebalancing a standard mix of stocks and bonds isn’t going to work nearly as well as it has.”

The other columnist wrote . . . “Wall Street’s boilerplate mix of stocks and bonds isn’t cutting it anymore.”

I could write a lengthy dissertation rebutting many of the points made in these articles. For this newsletter, I will keep it simple.

For most of the past 40 years, interest rates declined. This provided a strong tailwind for bond prices, accentuating total bond returns in portfolios.

Unfortunately, with bond prices increasing, investors were left with bonds and CDs paying minimal yields of 1 & 2 percent.

In 2022, interest rates experienced a dramatic reversal. The Federal Reserve increased the federal funds rate over five percentage points, causing bond prices to tumble.

As a result, the bond portion of portfolios experienced significant declines during a year when stocks declined as well. As you can see in the chart below, the traditional 60/40 portfolio had one of its worst years ever.    

The good news from falling bond prices is that now bond yields are pretty darn attractive. 

The fact that bonds dropped in value doesn’t make bonds less appealing as referenced in the two articles, it makes bonds MORE appealing! 

The headlines of those two articles should have read:

“With yields on bonds approaching 5% and more, the traditional 60/40 portfolio is more attractive than ever!”

With that in mind, is the 60/40 portfolio the ideal portfolio for you? 

Stay tuned.

Common Sense Investment Approach

Following headlines and market trends is never an ideal investment approach. Let's tackle your investment and financial plan differently. If you have $1 million or more of investible assets, strategize a plan with me that prepares you for whatever comes next.