Is the 60/40 Investing Approach Still Sound? - Adviser Investments

Is the 60/40 Investing Approach Still Sound?

In This Issue:

Is the 60/40 Investing Approach Still Sound?

In the current low-yield environment, it’s a question we get frequently: Is the 60/40 approach still a smart investment strategy? If so, are bonds the right balance to stocks right now or are there other/better options?

The short answer: Yes, the 60/40 approach remains a sound investment strategy.

Today’s headlines seem focused on pronouncing the classic balanced portfolio (60% stocks and 40% bonds) as outdated because the return prospects for bonds are, well, uninspiring. But you only need to look back to July 19—when stocks were down some 2%—for an object lesson on bonds’ role as portfolio shock absorbers. Why? Most bonds and bond funds rose, however fractionally, during that last dip.

Bonds aren’t intended to inspire; they’re designed to be dependable. When you buy a bond, you know with absolute certainty what the return will be over the life of that bond (unless it defaults). So, for example, if you buy a 10-year Treasury bond with a yield of 1.3% today, you’ll earn 1.3% annually over the next 10 years, at which point you’ll recoup the face value of the bond. That’s the dependability factor you don’t get with stocks.

The same principle applies to bond funds. With Vanguard’s Total Bond Market Index fund yielding 1.3% today, you can reasonably expect to earn 1% to 2% per year in that fund over the next five to 10 years.

Clearly, compounding at 1% to 2% over the next decade isn’t going to be the growth engine driving your portfolio’s value higher. However, the primary role of bonds in your portfolio is not to produce returns. If all you want is growth, you should be all-in on stocks, understanding there are no guarantees. But not everyone can (or wants to) stomach the ups and downs that come with putting 100% of their portfolio in stocks. And that’s where bonds come in.

Bonds have remained a reliable offset to stocks in a diversified portfolio—even in the low-yield environment we’ve witnessed over the past several years. The same can’t always be said of so-called alternatives like real estate or commodities.

Let’s look back to the first quarter of 2020, when the COVID-19 pandemic led to a panic in the financial markets. As Vanguard’s 500 Index fund fell 20%, the firm’s Total Bond Market Index fund gained 3%.

If we consider some of Vanguard’s funds that focus on differentiated investment objectives—Market Neutral, Commodity Strategy, Real Estate Index and Alternative Strategies—they all fell between 5% and 24% during the first quarter of 2020. We wouldn’t call that a successful offset to the drop in stock prices.

Note: Chart shows total returns of referenced Vanguard funds from 1/1/2020–3/31/2020. Sources: Vanguard, Adviser Investments.

We’ve said it before: Adding complexity to your portfolio doesn’t automatically lead to better investment returns. Keeping it simple often leads to more predictable and reliable outcomes.

Third-Quarter Webinar Replay: Rocket or Rollercoaster—Where Will the Markets Go From Here? 

In our live, interactive webinar last week, we shared our views on the markets and what we expect for stocks in the coming months.

Chairman Dan Wiener and Director of Research Jeff DeMaso offered their thoughts on strong corporate earnings, their inflation expectations amid pandemic-distorted data, the role of bonds in a diversified portfolio, and the potential impact of investor complacency.

In our Q&A segment, Chief Investment Officer Jim Lowell, Vice President Charlie Toole and Research Analyst Liz Laprade answered viewer questions on a gamut of topics. They addressed the potential opportunity in health care stocks, the implications of higher interest rates on the economy, our thoughts on cryptocurrency and more.

Can stocks continue to rise or is a bear market just around the corner? To hear our experts’ answers to your most pressing questions about where we go from here, click to watch our Third-Quarter Webinar now!

Advanced Estate-Planning Strategies

Passing on wealth to heirs is one of the primary objectives of most financial plans, and there has never been a more favorable time to do so.

Under current law, you can leave up to $11.7 million ($23.4 million for couples) in cash, securities or other assets to your heirs without incurring any gift tax. You can also give $15,000 annually ($30,000 if you’re married) to anyone you wish during your life. (However, these exemptions expire at the end of 2025, and they could change even sooner as part of a budget deal or infrastructure package passed by Congress.)

Here are four ways trusts can help you maximize the amount your loved ones receive under current law.

  1. Roth IRA Conversions. The SECURE Act eliminated the “stretch IRA” provision that allowed non-spouse IRA beneficiaries and trusts to stretch required minimum distributions (RMDs) out over the life of the heir. Now, those assets must be distributed to beneficiaries at ordinary income rates within 10 years of the original owner’s death. And when trusts are the beneficiaries, the tax rate is even higher than that of ordinary income. One simple solution is to keep the trust as beneficiary but convert the IRA to a Roth IRA—thus making future distributions tax-free.
  2. Irrevocable Life Insurance Trusts. An irrevocable life insurance trust (ILIT) is another tax-efficient way to pass significant assets down to your heirs. The ILIT owns a life insurance policy on the grantor’s life. When they pass, the proceeds fund the trust and are distributed to beneficiaries according to the ILIT’s terms. Life insurance proceeds not held in an ILIT are taxed as part of the insured’s estate. With an ILIT, those proceeds are excluded from the insured’s estate, reducing the estate tax burden.
  3. Intentional Grantor Trusts. These irrevocable trusts are funded with your assets during your lifetime. Normally, such a trust would utilize estate, gift and generation-skipping tax (GST) exemptions but still owe income taxes on the growth of the assets. However, if structured properly, a so-called intentional grantor trust can maintain the gift and GST exclusion while enabling the grantor to pay income taxes on the growth of the assets while they are living. This allows the trust to grow without triggering high taxes when you pass, leaving a larger pool of assets for your heirs.
  4. Grantor Retained Annuity Trusts. Historically low interest rates make this an excellent time to set up a grantor retained annuity trust (GRAT). Basically, GRATs are funded by the grantor in exchange for a stream of annuity payments, including the original deposit, over a specified period and at a predetermined interest rate. After the final annuity payment occurs, whatever remains in the trust is transferred to the beneficiary. With interest rates remaining low, many asset types and classes should appreciate faster than the distribution rate. That growth is then passed on to the trust’s beneficiaries free from gift and estate taxes. However, there’s a catch: If the grantor dies before the term of the trust ends, the beneficiary gets nothing and the trust is included in their estate.

These smart estate-planning tools are not for everyone—they can be complex and expensive to set up. Consult a tax expert before pursuing any of these options. We are happy to help!

Podcast: Meme Stocks and the Rise of Retail Investors

Traditionally, it’s the companies that make lots of profits that see their stock prices surge. But some of the most remarkable run-ups of the past year have been made by money-losing firms like GameStop and AMC whose “meme stocks” have won young investors’ affection.

Are we witnessing the start of an avalanche that will change the investment landscape forever? Or will these meme stock rallies disappear with barely a ripple, like a Pet Rock tossed in a pond? Portfolio Managers Steve Johnson and Charlie Toole discuss the new fashion for trading among young investors and what it means for the rest of us, including:

  • Why the race to zero commissions set the stage for today’s retail investment landscape
  • How the pandemic helped drive interest in the stock market among younger investors
  • The surprising power of social media to swing stock prices
  • What this speculative boom can tell us about overall market sentiment

This faddish phenomenon may not alter Wall Street forever—but there are lessons to learn from the topsy-turvy trend. Click now to listen today!

Adviser Investments’ Today’s Market Takeaways

There’s no shortage of hyperbolic headlines and provocative punditry in the financial media. But you won’t find such hysterics here. In Today’s Market Takeaways, members of our investment team provide timely videos that clearly and concisely explain what we’re seeing in the markets.

In our most recent Market Takeaways, Liz Laprade discussed how the market may manage delta variant concerns going forward, while Vice President Steve Johnson looked at whether the FAANG stocks have lost their bite.

We hope you find these episodes engaging and accessible. If there are any topics you’d like us to address, please send an email to info@adviserinvestments.com!

About Adviser Investments

Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFs, fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trusts, foundations and institutions meet their investment goals. Our minimum account size is $350,000. Adviser Investments was named to Barron’s list of America’s Best Independent Advisors and its list of the top advisory firms in Massachusetts in 2020, our eighth consecutive appearance on both lists. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015, 2016, 2018 and 2019.

For more information, please visit www.adviserinvestments.com or call 800-492-6868.


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The Barron’s America’s Best Independent Advisors rankings consider factors such as assets under management, revenue produced for the firm, and quality of practice as determined by Barron’s editors. According to Barron’s, “around 4,000” advisory firms were considered for this recognition in 2020, with about 1,200 firms receiving recognition. The award sponsor has not disclosed how many firms were surveyed or considered for this recognition, nor the percentage of total participants that ultimately received recognition. For more information and a complete list of recipients visit https://www.barrons.com/advisor/report/top-financial-advisors/independent. Years Received: 2020, 2019, 2018, 2017, 2016, 2015 & 2014.

The Barron’s Top Advisor Rankings by State (Massachusetts) (also referred to as Barron’s Top 1,200 Financial Advisors) considers factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. According to Barron’s, “around 4,000” advisory firms were considered for this award in 2020, with about 1,200 firms receiving recognition. For more information and a complete list of recipients visit https://www.barrons.com/report/top-financial-advisors/1000/2020?mod=article_inline. Years Received: 2020, 2019, 2018, 2017, 2016, 2015 & 2014.

The Financial Times 300 Top Registered Investment Advisers is an independent listing produced annually by the Financial Times and Ignites Research. According to the Financial Times, in 2019, approximately 2,000 firms were invited to be considered for its list; 740 responded, with 300 being named to this list. The listing reflects each practice’s performance in six primary areas: Assets under management (70-75% of a firm’s score), asset growth (15% of a firm’s score), years in existence, compliance record, credentials and online accessibility. For more information and a complete list of recipients visit https://www.ft.com/content/44d2b2b2-6cef-11e9-9ff9-8c855179f1c4. Years Received: 2019, 2018, 2016, 2015 & 2014.

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