Book Appointment

S2E13 - Is the 60/40 Portfolio dead? [Part 1 of 2]

Season #2

Hello libel. How you feeling today, sir? I'm doing pretty good. How about you? I'm doing well, and I'm really excited to talk about today's topic because we've talked about it on the edges before. I'll say it that way. Uh, I'm looking at, uh, the idea that.

Investing. In my opinion, investing strategies really don't get more classic than the so-called 60 40 allocation, holding 60% of your portfolio in stocks and 40% in bonds. And the thinking goes that you can get the best of both worlds, high growth potential from your riskier stocks and protection from your more.

Conservative bonds, but I was also seeing a report libel that this could be the worst year ever for the 60 40 portfolio. How do you stand on that? Well, , I say, Well, where I stand doesn't really matter. You know what matters is reality, right? ? Yes. And, and the reality is, uh, is that, you know, this is gonna be one of the worst years for bonds and.

Here's the thing, right? It's like, you know, people are acting surprised like that bonds are having a really volatile year and that they're all over the place and they've lost more than you know they've ever had in the last like 20 years. But here's the thing, right? We knew this was coming. Anyone who understands how bonds work, Fundamentally understood that this is what's gonna happen, that that bonds were going to take.

Now does that mean that people lost their money? It depends how you're invested. It depends how you have your 60 40. Um, and so when we think about these rules that we have about investing, about retirement and what we should do, And especially if you start looking online, right? It's, you know, we, we like to think that, you know, knowledge has been there for forever and that the internet's been there for forever.

But the fact is, is that the internet only really came into, into its, um, you know, into being, into being something that had had a lot of resources in the late nineties. Right, And so for most of the life of the internet, bonds have acted a very specific way because interest rates have been really, really low, artificially low.

And so all the people who are writing articles online and all the content that you can find online are based on this environment. That we've had for the last 20 years, which is not what we're existing right now. It's not what we're experiencing right now. And anyone who was invested, you know, at any period of time where interest rates were on the rise, where interest rates were being volatile and there was uncertainty about the future or inflation.

Would know that this is what was gonna happen. And unfortunately, uh, there's, you know, a lot of advisors haven't experienced that themselves, or they didn't understand what it meant that, you know, when interest rates go up and when inflation goes up and. They just stuck with the 60 40 because, you know, nobody ever got fired for, you know, purchasing an ibm.

Right. I'm sure you've heard that saying, . It's, it's the safe thing, right? If the SCC comes in, if an auditor comes in and says, Why did you allocate your client this way? You say, Well, 60 40, there's, you know, a whole lot of academic research. Everyone says it. 60 40 is a good thing to have for a retiree. You know, when you think about it, is it really a good thing to have?

Does it actually make sense? It really depends on what's gonna happen now and in the near future. And that changes, right? Especially when we have the Fed raising interest rates and central banks across the world raising interest rates. What do you think that does to loans? Right? So our mortgage rates go up, Well, bonds are just loans to companies.

Wow. Everybody libel sternbach with us this weekend and we're talking. The 60 40 portfolio, and I'm just so based on what you've just shared in response to my first question. In your opinion, do you think bonds are no longer safe in this regard? So I think that they were never sa, you know, quote unquote safe.

I, I don't think that you could treat any asset class or any investment, right as being safe. The only reason why they are technically safer than stocks is because if a company goes into bankruptcy, You have priority over the majority of shareholders, right? Because you are a debt and debts get paid before the owners of the company.

The owners are the last in line when there's a bankruptcy, so that's why people talk about it being safe. The other reason why they happen to tend to be like, you know, less volatile, I'm not gonna say the word safe, I'm gonna say less volatile, that they don't move as much as stocks. Mm-hmm.  is because, They don't move as much as stocks  because their value is derived by the fact that they're a loan, that you loan them, the company money, and the company is guaranteeing you a certain interest rate.

So the only time that their value is gonna change, right? Everyone knows how much that interest rate that you're gonna get on that is you loan a thousand dollars and let's say it's a 10% interest rate, you're gonna get. You know, a hundred dollars, that's, that's what your payment is for giving this loan.

Everyone knows it, so it gets priced in. Now, the only time that that price moves around is when people either fear that the company is gonna go bankrupt and they can't pay their creditors. Right.  or if all of a sudden people can start using their money and get more, a higher interest rate, if you know all of a sudden companies are paying, you know, 15% interest and you're holding a 10% loan, right?

And you're only paying 10%, well you got one of two choices. You can either hold that to maturity, right, get your principal back, or you can try to sell it to someone else and buy something that pays more, right? And that's really where that volatility comes in. If you need to sell this, if you need to convince someone else to buy something that is below market value, right?

That everyone else is paying more and you have something that's, you know, pays less well, you're gonna have to take a hit so that the new investor can receive the same amount of profit as everyone else, right? And you're in a, in a bad situation, right? If you're, if you're forced to have to sell this, At, at, you know, a lower rate, at a discount.

Um, so people are taking advantage of that and that's what happens. So it's not that it's less, you know, it's not that it's more safe than, than equities or that it's, you know, there's something inherently safer about it. No, it's just that it tends to move less when interest rates move less when the bond market moves less When.

Loan prices are loo are are moving less. When the outlook for the future is stable, then yeah, they tend not to move. But when people don't know what company is gonna survive, right? When we're worried about a recession and they're trying to figure out, okay, who has good balance sheets, Who's gonna be able to pay off their debt, Who's gonna be able to survive?

And we have interest rates are moving. So people can go move their money elsewhere, make more money. Right. So you lose, you lose your buyers and you have to incentivize 'em to buy from you. Then yeah, it's gonna become very volatile and it can become even riskier than stocks. The only thing that you have with a, with a bond that you don't have with stocks is that if you hold it to maturity, you can get your principal back, assuming the company remains solvent.

So it sounds like, Go ahead. But there, But there's a catch here, right? Yes. Okay. How it used to be that people bought individual bonds, the vast majority of people don't buy individual bonds anymore, right? We're now buying bond ETFs and all these packaged products, so we don't get to control whether we get to hold it until, until maturity, and that makes it extremely risky.

And in fact, I think it makes it even more risky than equities because you know that they're buying and selling things at the wrong time because they. Well, interesting everybody. We're talking with libel stern box. So does that mean that does a fundamental, uh, a way that we manage our money when we're talking about saving for retirement?

Mean that if we're investing that in order to come out, uh, the wave that we would like to on the back end, that we do have to ride the wave the wave and accept the ups and downs of the market and the bond. So I think that you shouldn't ever ride the wave, right? Listen, unless, unless you're really young and you've got a long time ahead of you, right?

Then you can afford to ride the wave and the law of averages is gonna work in your favor. Um, but when you're nearing retirement or you're in retirement and you're taking money out of your portfolio, then you don't have the time to ride the wave. But not only that, but every time you have. And you take money out of your portfolio, you're, you're going further down than everyone else, which means it's gonna be harder for you to come back up.

So when everyone else, right? And when in your working years you rode it down, okay, You tightened your belt a little bit, but you also got the benefit from that dip by investing more during buying more stocks or more shares because they were at a discount. When you're contributing to your 401k or your retire, Come retirement when you're taking money out, that starts to work against you, right?

So I think very much as we transition into retirement, our mindset needs to not be, let's ride the wave. It needs to be, how can we smooth out the wave? How can we not be on the same rollercoaster ride that everyone else is? Right? Um, you know, you don't wanna be, you know, well, you know, I'm very brave and I'm, you know, I'll go, go on the big roller coaster, right?

No, you know, you wanna be on the kid roller coaster. When you're in retirement, you wanna have just enough bumps. That your money grows at the pace that you need it to grow in order for you not to have to change your lifestyle in retirement. Mm-hmm. . But you don't want any more volatility than you have to.

You don't wanna be holding on for dear life and wondering whether you're gonna puke your guts out. Right. And whether you're gonna still be around at the end of this ride. I love your analogies in life, but we're talking with libel Sternbach about the 60 40 portfolio and I, I get a. That, uh, with, even with the, the basic questions that are out there in the marketplace today, that there are many investors, either new investors or even ones who have been with, uh, with different companies for a long time, don't have a fundamental basic on what a bond actually is.

Can you level set for a lot of folks who are listening today, Yeah, the best analogy that I have for a bond, and forget about what it actually is, right? It, it's, you're loan money to a company. So think about, you know, your worst relative who comes up to you on the holidays and, you know, they're always, you know, drunk and they're always, you know, losing their money and they're asking you for money.

That's how you should treat a bond and what you should think about it is, right? So you're loaning money to somebody who you don't, you're not really sure whether they're gonna be able to turn it into something or not, right? The price of the bond, right? If you just waited it out until they paid you back, and maybe they'll pay you back.

Maybe they'll pay you back in a year when they said they would. Maybe they paid you back in 10 years, right? Then eventually they'll pay you back. That's fundamentally a bond. But how it works in your retirement, how it works in your portfolio, and especially these bond funds, I want you to think of a seesaw.

Right. Kids playing in a playground, they got a seesaw, right? One kid goes up, one kid goes down. On one side of that seesaw, you have your return, right? So that's the interest that's being paid to you on the other side, right? You have interest rates, right? And so as sorry, the price of your bond, right? So as interest rates rise, the price of your bond has to go down one side of your seesaw.

One kid has to go down in order for your bond to produce a. That's equivalent to the higher interest rate when interest rates go down, right? Your bond that's paying a higher interest rate goes up, right? And the other person on the seesaw is down in Europe, right? It's a seesaw, right? People think about it and you're like, Well, it's safer because usually it's flat, right?

Usually you have two kids who weigh the same amount and you know, words. One kid's just slightly heavier than the other, and everyone knows and they don't move and they don't jump up and down, and if they don't play around, But what happens when the kids start being kids again, Right? And one of them starts gaining weight and the other one is, you know, becomes antsy.

All of a sudden you're gotta, you gotta ride and it's going up and down, up and down, and you're losing your shirt. , what a great analogy. And we're talking about the 60 40 portfolio in different aspects of it. Do you have information on yields for that we can access about the 60 40 portfolio? Yes, absolutely.

So if you go to my website, yields for, you go on there, go to classes, we've got classes on investing, we've got resources under resources, we've got guides, we've got checklists, we've got on the blogs, we've got blogs on how to do it. But if you have any questions about your portfolio, if you want us to take a look at a second opinion, just hit that book appointment and we'll be more than happy to answer any questions you have.

This is just something that we do for the. All right. Libel Sternbach definitely is on fire this weekend. Be sure to join us next week when we'll continue this conversation on the 60 40 portfolio.