Are you still a believer in the 60/40 portfolio? The S&P 500 is down 17.39% YTD as of the writing of this article. US Government bonds are down 15.67%. Passive investors are calling it normal. They believe this model always returns 8% to 10% if you wait out the downtrends. What if it doesn’t? Inaction could cost you your retirement savings.
It’s not the first time the S&P has shown red numbers. Annual returns have been in the negative six times since the turn of the century. Three years (2002, 2008, and 2022) have been -20% or more. Bond yields at that time don’t even match the rate of inflation. Run the numbers for yourself. The 10% return on a 60/40 model is not happening right now.
Going “Back to the 80s” is Skewing Market Projections
Do you believe that market performance in the 80s is relevant today? We’ll beep your pager. You can find a payphone to call us back and make your point. Sadly, that’s how far behind the curve many market projections are. Even the newer financial planning tools are doing 50-year lookbacks to project 10% returns. Meanwhile, the S&P is up just 6.44% since 2000.
Let’s do some math. According to a Gallup poll released earlier this year, working adults start saving for retirement at the average age of 29. We’re twenty-two years into a 3%-4% drop in S&P returns, but financial planners are telling them to expect 10% before they retire. That’s ten to fifteen years away for people who started saving in 2000.
This generation has already been through 9/11, the 2008 housing crash, and the Covid-19 pandemic. The bottom dropped out of the market each time and now we’re on the cusp of a global recession. Have you noticed the drop in your 401(k)-retirement savings? You’re not alone. Outdated investment philosophies are affecting everyone.
Alternative Investments can Boost Your Returns
One of the least productive sayings on earth is, “this is the way we’ve always done it.” Sticking to a stock/bond mix without considering alternative investments is essentially making that same declaration. The way we’ve “always done it” is no longer working. Expanding into other, often riskier, asset classes is the only way to get those returns into double digits.
Cryptocurrency is a good example. Many investors view it as too volatile to rely on, but others have made substantial money on it. Like anything else in the investment world, high risk sometimes leads to high rewards. Where were you when Bitcoin hit $64,000 in 2021? Chances are you were smugly watching the S&P peak. How do you feel about that today?
Active investors took advantage of the crypto spike last year. Many of them sold their BTC when it hit that all-time high, knowing the bubble would burst at some point. Passive investors are still holding their S&P stocks, waiting for the next uptrend. Based on a twenty-year lookback, they’ll make 6.44%. Inflation hit 9.1% earlier this year.
The Holistic Approach with REITs, Insurance, and Mutual Funds
Tactive advisors are active investment managers who believe in a holistic approach to portfolio construction. That means embracing alternatives. Real estate investment trusts (REITs), according to research published earlier this year by The Motley Fool, have produced an annual return of 13.3% over the past twenty years. That’s double what equities did.
Variable life insurance policies are permanent insurance plans with an investment component. The returns aren’t spectacular, but they’re a bonus to buying a product that provides peace of mind. As for mutual funds, there are large-cap funds that have produced upwards of 19% in the past twenty years. Ask your financial advisor about those.
Henry Ford said, “If I asked everyone what they wanted, they would have said faster horses.” He took a chance and produced the automobile instead. That’s the type of thinking we need in the financial sector today. The world has changed. It’s time we did the same.
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