What Your Financial Adviser Won’t Tell You About the Traditional 60/40 Portfolio

Most financial advisers get paid to invest their clients’ money in bond funds.

They don’t have their clients’ best interests in mind. Instead, they put your money where it will be most profitable?for them.

What I mean by that is that certain financial adviser companies get fees for investing their customers’ money in other bond funds. They get paid even if these don’t provide great returns for their customers.

And this is common amongst the 'mainstream advisors'...especially for retirees.

Many advisers like to push the traditional 60/40 portfolio. They’ve relied on it for decades.

If you have a financial adviser, chances are you have some of your money split up that way. But I’ve got bad news for you.

The 60/40 portfolio doesn’t work like it used to when bonds were yielding much higher percentages.

Really, it hasn’t worked like that for about 15-20 years. Why? First, there’s the record volume of cheap money that major central banks have crafted in the past 15 years. That includes the Federal Reserve.

Second, there’s the influence central banks have over how Wall Street and giant companies use that cheap money.

The 2008 financial crisis catapulted the power of these central bankers. Then, the Covid-19 pandemic came along and turbo-boosted it.

These two crises gave central banks more power over the markets, governments, and the economy than ever before. No matter who took the helm, central bankers’ use of “emergency” monetary “tools” was pretty much the same.

So if your adviser has you in that sort of 60/40 split, it may be for their own benefit – not yours.

Let me explain…

The classic 60/40 portfolio is one more example. It’s still by far the most common investing strategy followed by financial advisers.

And there is a good reason for that: Liability.

As long as advisers have you in a balanced portfolio, they can claim they’re doing their financial due diligence.

60/40 portfolios split your money into equities and bonds. Usually, it’s 60% in stocks and 40% in bonds.

If you go to a financial adviser, they will tell you this old diversified approach is best. They will preach that you should have both secure (bonds) and risky (stocks) assets in your portfolio.

The logic is simple enough. When stocks do well, they flatter the performance of the portfolio. When stock prices fall, bonds do well.

Bonds also supply guaranteed income. That allows bonds to soften the blow from volatility in the equity market. (Remember, bond funds are doubly risky...).

A Broken Relationship

And that’s not the only reason the 60/40 portfolio is the most popular asset mix offered to retail investors.

Advisers will also tell you the strategy has a long history of generating strong, consistent returns.

For decades, bonds and stocks moved (more or less) in opposite directions. Traditionally, when one went up, the other went down. By owning bonds alongside stocks, you got a convenient hedge. But even Bank of America now acknowledges that's no longer the case!

And here’s what your adviser probably won’t tell you: That relationship has been breaking down as of late. You can see this in the chart below…

Over the last year or so, you can see bonds and stocks moving (more or less) in the same direction at the same time.

Also, bonds significantly underperformed stocks. The S&P 500 jumped 21.5% in 2021. Meanwhile, the 20+ year Treasury Bond Fund (TLT)?fell 3.5%.

That means bonds failed to offer a hedge against risk in the stock market, one of their traditional roles.

And the timing of the moves resulted in bonds dragging down the performance of the 60/40 strategy.

When we look at the superficial data, it says one thing. When we look under the hood, it says something completely different.

Take BlackRock’s 60/40 Target Allocation Fund (BIGPX), for example. It holds a globally diversified portfolio of bonds and stocks. It returned just 6.1% over the last year.

In other words, that 60/40 blend even underperformed inflation, which recently hit 7%. That’s not what you want from a portfolio that claims to be the “safe” choice.

And if the Federal Reserve raises interest rates, as it says it will, bonds could suffer even more. The rest of the portfolio would need to hedge that risk in bonds. Right now, the 60/40 model is not suited to that task.

So where can we look instead?

The answer is, we need to look beyond the traditional portfolio. We need assets that can give us the same protection against risk and potential for consistent gain as the 60/40 portfolio did in the past.

Your adviser will never tell you that. Advisers look at clients like gym memberships. Most people pay but rarely attend. And most advisers don’t get paid for performance. They get paid for the volume of money they are managing for you.

Advisers think less communication is the key to them holding onto our money. Which is why we have to think beyond the 60/40 split.

The major university endowments abandoned the 60/40 model years ago. The most successful ones have been investing in alternative assets for decades.

In fact, over the last 20 years, adding alternative assets to their portfolios improved their average performance by 38%, annualized. That’s going by research from the Chartered Alternative Investment Analyst (CAIA) Association.

In the past, these alternative investments meant things like private equity and venture capital. Both were out of reach for most investors.

But today, regular investors have many of the same opportunities as institutional investors. stem.

For example, we’ve seen the rise of new asset classes in the last 14 years… from fintech (financial technology) to cryptocurrencies.

This revolution has helped bolster portfolios when bonds and stocks fail. It’s no wonder that major university endowments have dipped a toe in crypto in recent years.

Here is crypto news site CoinDesk with more:

Back in 2018, Yale University Chief Investment Officer David Swensen made headlines by backing two crypto-focused venture funds… [One was] run by Andreessen Horowitz and another launched by Coinbase co-founder Fred Ehrsam and former Sequoia Capital partner Matt Huang.

Several other universities followed Yale in backing crypto VCs [venture capital funds], including Harvard, Stanford, Dartmouth College, MIT, University of North Carolina and Michigan.

As we’ve seen in recent weeks, sometimes all assets rise and fall together, including cryptocurrencies.

But even with volatility in the short term, the gains these assets make in the long run bring the an aspect many portfolios need. But we also need to balance the risk...

Buy Portfolio Insurance

Cash value life insurance is a great hedge from the market and is recognized as one of the most “certain” places you can put money.?When built and funded properly, these assets have a number of surprising benefits…

If you can find any other financial product with this combination of benefits, please tell us about it!?

With permanent life insurance you can...

• Grow your money at as much as 7% over the long term
• Have a contractual guaranteed minimum growth rate
• Compound your money tax-deferred (pay no taxes on gains each year)
• Completely avoid risk of principal loss—meaning you can sleep at night knowing your account balance won’t go down in value (even if the stock market crashes 50% tomorrow)
• Safeguard your money in a place with a century-long track record of safety.

It’s such a safe vehicle that you can also…

• Protect your money from creditors or lawsuits (in most states)
• Contribute unlimited amounts to it (unlike an IRA or 401(k))
• Avoid reporting it to the IRS come tax time
• Access your money anytime without penalty or withholding taxes
• Build a line of credit to use for any reason—no questions asked.

One of the first rules in preparing for inflation is not to lose money. Because if you lose money, you not only have to make up for the loss, you have to catch up to the loss in purchasing power of your money…a double whammy. These contracts will not lose money.

In fact, these assets are so safe banks have billions of dollars in them - as Tier 1 Capital.

Upgrade Your Retirement Plan

In short, cheap-money policy has created distortions in just about everything. The once-trusted 60/40 portfolio is one more victim of that distortion. That isn’t going away. But you don’t have to be a victim of it, too. You can adapt to overcome the challenges.

That means trying new strategies that provide solutions to a changing world. And that’s something you can’t get from an adviser who only cares about their fees.

Today's traditional retirement plan was designed over 30 years ago when 401k plans and IRAs replaced pensions.

Hasn't our society changed since then?

- We upgrade our cars so we don’t get stranded.

- We upgrade our software so our computers perform better.

- We upgrade our smartphone apps so they do more for us.

- When was the last time you “upgraded” your Retirement Plan?

Financial freedom starts with taking control of your own future – and embracing change. That’s what I’m here to help you with. Contact Us

?

?