Internet advice is one of those things that we all are guilty of reading, the good, bad and ugly. I’ll admit I read too much internet medical advice. And I’m dismayed by the level of internet investment advice, especially with the 60/40 allocation strategy. Last week I went in to see my doctor for my annual exam. And God bless him; he humors me by listening to the medical information I have read and think I should follow. Consequently, he often reminds me not to confuse my internet search with his medical degree.
So, as you know from my previous articles, I lost a lot of weight this past summer—three cheers for me. I’ll tell you how I did it another day. But recently, I have been on a quest to build back muscle. Oh, and don’t worry, I’m not getting into bodybuilding. You can stop laughing. I’m far from it.
You see, I realize that as I age, strength will be a problem when I’m in my 90s. Consequently, I look at strength and aging like this, have you ever met a 90-year-old that says, I wish I weren’t so darn strong? I know that sounds kind of silly, but it’s true.
As people age, frailty becomes a problem. And as you age, frailty will be a problem that affects every aspect of your life too.
All right, so I’m going to throw some big words out here but bear with me. This does have something to do with investing.
So, I researched that I could get a DEXA scan that would measure my Appendicular Lean Mass (ALM), which is the muscle mass of my four limbs. Then I could put my information onto a nomogram that would compare my ALM to other men my age. My goal would be to work toward being in the 90th percentile of the nomogram.
OK, the fancy talk is over for now. I said all of this with a straight face to my doctor. And he nicely said, “why do you want to waste your time and money doing all of that? You don’t need a DEXA scan to tell you that you have lost muscle mass. Just look in a mirror.”
He went on to say, “Plus, you already know that you want to improve your strength. So, increase your protein intake, monitor your calories, and start exercising. You don’t need to see where you compare with other people. You want to get to a point where you are happy with yourself.”
At that point, I felt silly. I guess I was b-dazzled with the thought of being able to graph my information when it doesn’t matter if it is on a graph or not. My strategy was information overkill.
Here’s how this relates to investing.
I read an article recently that made me start thinking about how my medical research overkill related to that article. The article was about how the very common strategy of investing 60% into stocks and 40% into bonds was performing terribly.
Here’s the title that caught my eye. The 60/40 Stock and Bond Portfolio is Having Its Worst Year in a Century. The 60/40 topic seems to be in many financial news sources. This one came from Barron’s. But you can put that title in your search engine, and it is not too hard to have investment research overkill. Much like I did when I was researching medical information, be careful not to be b-dazzled or b-dazed by the information you find.
So, what do you do if you are diversifying with stocks AND bonds? Then you read scary headlines like the one from Barron’s. Should you give up and sell everything? Hardly.
At this point, I’m going to put my advisor hat on and tell you very nicely not to confuse my financial certification with an internet search. I’ve got a lot more experience and knowledge to answer this question than most of those writing articles about it.
Here’s the lesson I suggest you learn. First, look at where you are in your life as it relates to retirement and how far along you are in your savings. If you have more than ten years to go before retirement, you probably don’t want to change just because the wind is blowing away from the 60/40 strategy. But then again, if you’ve got ten years or more to go before retirement and you are using the 60/40 allocation, you might want to look again at the strategy. 60/40 is intended more for those close to retirement. I go into this in more detail in one of my previous posts, “Does Asset Allocation Still Work in 2022?“
However, if you are closer to retirement, look at the purpose of your strategy. The question I ask my clients is this. Why do you want to have 40% of your portfolio in bonds? That is not meant as a negative statement. But what do you want your 40% in bonds to do?
As it may be, most of my clients would turn the question back to me. I can see many of them saying, “you’re the advisor; what should I want the 40% in bonds to do?” And with that, I would say, “you should want your bonds to not be like stocks.”
That may sound simple. But I view holding bonds as a safe haven from the volatility of stocks. That is contrary to how most people are using the 60/40 strategy. For most, the idea of bonds is conservative growth. And I think that is a mistake. Growth, in my humble opinion, can primarily come from ownership, and that is mainly done with stocks.
So here is the secret to successfully using bonds as a safe haven from stocks in the 60/40 asset allocation strategy. First, look at the term or years to maturity of the bond. If it is less than one year, that asset is much less volatile than stocks, intermediate or long-term bonds.
Short-term bonds give owners a better possibility of the return of their money rather than a return on their money. And nowadays, most people would be happy with that strategy.
Hopefully, I have given you a little more financial knowledge that will help you better control your financial future. And as always, please remember that this information is for educational purposes only. This information is not investment advice.
Have a great week,
Leave a Reply