As we find ourselves in the middle of 2023, the landscape of retirement investing has seen a seismic shift. We've watched the traditional 60-40 portfolio model — 60% in stocks and 40% in bonds or other low-risk assets — struggle to keep pace with current financial realities. It is not an overstatement to say that the dynamics of investing for retirement have changed fundamentally.
In the past, advisors suggested one of two approaches. Either they chased high-risk "bond-like" assets to compensate for the lackluster returns of traditional bonds, or they adhered to the 60-40 model, knowing full well that their clients' assets were not growing as fast as they should have. Neither approach is sufficient in the present climate.
2023 - The Year Everything Changed Forever
Enter 2023: we're looking at interest rates that have not only gone beyond the historical average for the Federal Reserve rate, but are also slated to rise further. Bonds, which have been a stable investment for the last decade, are not so stable anymore. Their prices are fluctuating greatly, making the goal of a low-volatility retirement portfolio more elusive.
Until a couple of years ago, many financial advisors, myself included, were perfectly content with having clients invest in target date funds, the asset allocation of which typically adheres to a 60-40 or 70-30 risk profile. But with the current upheaval in interest rates, I now advise clients to separate their investments. I recommend that they directly invest in equities for a portion of their portfolios and then directly in treasuries or another safe asset.
Indeed, many target date funds we have seen are taking on excessive risk. If we look at their growth charts over the past two years, they've experienced significant declines and have not fully participated in the recovery. It’s a bitter pill to swallow: if they didn't protect investors on the downside, they should at least help them capitalize on the upside. Unfortunately, across major firms, very few managed mutual funds are adequately managing risk, and almost all of them are failing to provide substantial returns.
The time for a more hands-on approach to retirement investing is now. Bonds, often considered a staple of a balanced portfolio, require a new perspective. Buying one-year or three-year treasuries is a common move among professional investors, but I encourage a much shorter-term approach.
In addition, it is crucial to consider the broader economic context. What if inflation remains at four or five percent for the next few years? What if four percent becomes the new normal for the next decade? These are questions that investors must seriously ponder, as the answers will significantly impact the bond and stock markets. Venture capitalists are already feeling the effects of changing interest rates, which are reshaping the dynamics of startup funding in Silicon Valley and beyond.
The realities of 2023 call for a forward-thinking approach to retirement investing. A buy-and-hold, set-it-and-forget-it mindset no longer suffices. Instead, investors must anticipate future economic conditions and adjust their portfolios accordingly. After all, it's not about what performed well in the past, but about what is poised to thrive in the future.
To that end, it is crucial to take control of your investment strategy, make informed decisions, and ensure that your retirement portfolio is not just surviving, but thriving in this new financial landscape. Only then can you rest easy knowing you are prepared for the future, whatever it may bring.
A Dangerous Time for Retirees
The current financial landscape can be seen as both precarious and advantageous for retirees, depending on the level of involvement they're willing to take in managing their investments.
Indeed, the situation is precarious in that passive participation in retirement plans, which has been the norm for many investors over the past few decades, is no longer sufficient. With the changing market d