If you’ve been learning or actively engaged in trying to secure your retirement, you know that investments are a wise choice. And a portfolio of 60/40 is what most people learn about. Today, we’re going to be discussing the 60/40 portfolio, what it means and a lot about bonds and bond alternatives.
What is a 60/40 Portfolio?
The 60/40 portfolio is one that many people hear about when starting their retirement planning. What does it mean?
- 60% of your investments in equities
- 40% of your investments in bonds
Bonds carry very little risk in traditional markets. You can take on the risk of stocks and still have 40% of your money in bonds that offer low returns.
And from the outside, the breakdown is good for investors because bonds have low risks.
However, due to the current economic state we’re in, bonds are riskier. Bond alternatives are available, which can help you further diversify your portfolio and possibly eliminate your traditional bond holdings.
Example of a 60/40 Portfolio
A 60/40 portfolio is easy to visualize if you have $1 million in investments.
- $600,000 in stocks, mutual funds, etc.
- $400,000 in bonds
If you have a portfolio like this, market volatility can’t wipe out your entire portfolio. However, we’re estimating that for the next decade, bonds will be volatile due to the low interest rates we’ve had since 2008.
Bonds and the Index to Examine
When you talk about the stock market, you think of the S&P 500, Dow Jones or NASDAQ as a gauge for how well the market has done or is doing. With bonds, you can’t look at the same indexes. Instead, you’ll want to judge the performance of bonds based on:
- Aggregate bond index (AGG)
The AGG index has a very diverse building of bonds, and when you take snapshots of the index year-to-date (January – April 2022), it’s down 6% to 6.5%. If you’ve been told that bonds are a safe bet and then you see that the AGG index is down dramatically in the first four months of the year, it’s evident that there’s an issue going on.
Normally, bonds perform better when the market is performing poorly, but in this case, the markets are down just 3% this year.
For 10 years, interest rates were low, and now with the Fed raising interest rates to control inflation, the bond market is going to struggle for quite a while.
What are Bond Alternatives in 2022?
Bonds are having issues, and if you have them as a strategy to secure your retirement, it’s time to consider bond alternatives. A bond alternative needs to do a few things:
- Offer a safe investment versus the market
- Provide you with an income
Over the past few years, annuities have shown their strength and ability to offer a safe alternative to bonds.
Why?
First, a fixed annuity cannot lose in a year. In the worst case, you earn nothing in the year. You can never lose money, so from the risk perspective, annuities offer a low-risk alternative to stocks.
In our own experience, we’ve seen that annuities earn in the 3% to 6% range each year over the last decade.
While an annuity may not earn you 3% to 6% every year, it also won’t lose money. You can depend on the income of the annuity since it will never lose money.
Structuring an Annuity into Your Portfolio
You can choose a 60/40 portfolio if you like, but you also must understand that every family is different. There’s no right or wrong structure for your portfolio, and that’s the beauty of annuities.
We always start off with a retirement financial plan to:
- View where you are today
- View where you’ll be when it’s time for retirement
A retirement financial plan considers everything:
- All income sources
- Expenses
Annuities provide a safe, reliable, and non-reliable source of income. Plus, if you’re like most investors, you still have a growth bucket with your money tied up in the markets. If you’re not touching the investments, they’ll grow untouched for a long time while you rely on annuities to generate income.
Bonds aren’t a horrible choice for investors.
You can and should buy bonds when they’re stable, but with the Fed stating that they’re going to be raising rates multiple times in 2022 and 2023, it’s time to look at your portfolio as a bond holder.
The rising rates will have a negative impact on bonds.
In the meantime, we recommend a fixed annuity as a bond alternative because they offer a decent rate of return, cannot lose money, and provide a source of income that you can tap into at any time.
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And if you want to learn more about bond alternatives and fixed annuities or simply want us to run a retirement financial plan for you, schedule an introduction call today.