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Do Old Allocation Rules Still Apply?

It seems we live in the best of times and the worst of times simultaneously, and from what I’m seeing on my social media feeds, people appear to be split on which one they think we’re in! Despite that, there’s still the age-old question about that rule of thumb that investors should hold a stock percentage of 100 minus their age. In other words, if you’re 50 years old, your portfolio would hold 50 percent stocks and 50 percent bonds, and a 30-year-old should hold 70 percent stocks. 

Let me tell you how this ends before I tell you a couple of stories. Because I don’t know your specific situation, I don’t know what the right answer is for you. You and your spouse could be between ages 60 and 65 with plenty of money from pensions and Social Security. Your need for funds from your retirement accounts may not be high, so that formula may be just the thing for you. 

Or, you might be a 50-year-old widow whose husband left you with no life insurance policy, and retirement accounts you thought you’d both be funding for years to come. In this case, a 50/50 split may not be growth-oriented enough to help you catch up, unless you plan to work until you’re 85. 

So, for you, I don’t know the correct allocation until, like a doctor, I understand what your symptoms are, or if you’re not having any issues, what your future plans, dreams and goals are. Once I understand that, I can work with you to determine how we might ensure that you achieve those goals. 

Now, you might be thinking, “Dave, you took the easy way out! Shouldn’t 100-minus-age just be your allocation??” Well, it should be that simple, and I wish it was. Unfortunately, we don’t live in a world where stock returns are dependable, and for the last decade-plus, we’ve been living in a world where bond yields and returns are less predictable than the dividend yield of blue chip stocks, to compare apples to oranges. That said, a yield is a yield. It’s still cash flow whether it’s from earnings or debt, and with Federal Reserve Chairman Jerome Powell reiterating last week that they will be using a full range of tools to support the economy, well, bond rates aren’t likely to budge significantly any time soon. 

This game of extending low interest rates is essentially driving anyone seeking to earn more than 2-3 percent into the equity markets, which robs from the generation of fixed asset investors who do believe in the 100-minus-age formula. This February action from the Fed all but sticks its tongue out at the theory that a balanced account best guards against volatility. That’s not necessarily true in this climate. 

We’re already starting to see inflation in real estate. There’s no way we can have low rates while printing money and seeing the recent inflation in things like home prices and building materials, and not hurt the fixed income markets. 

At Family Financial Partners, over the last decade, we have heeded the warnings on this issue by intentionally carrying less fixed income to try to remedy the market manipulation that’s occurring by the Federal Reserve. I’ve seen client portfolios in the 50-and-up age group have basically half their portfolios doing nothing, and the other half doing whatever the markets did. For the folks in this situation, they didn’t understand why their overall portfolio wasn’t performing. They simply hadn’t given any consideration to interest rates, and the fact that the Fed is driving people out of fixed income. 

If this sparked any interest in reviewing whether you’re properly allocated based on your goals and risk tolerance, our team would love to sit down with you and give you a no-nonsense second opinion. Initial consultations are always no-cost, and no obligation. I know many of you who read this are self-directed investors, and you’re proud of that. If you do what I do for a living as a hobby, or your retirement job, that’s great that you’re being responsible with your finances. 

But for the rest of you who aren’t working with us, I suggest taking the time to compare me and my thoughts, who has nothing to lose in helping educate you, with what you hear from your advisor, or the internet. Is it different? What’s their angle?

Our only angle is to help our client families do everything they can to achieve their goals, based on their individual risk tolerance. So here’s to continuing the discussion about your investment journey in 2021. Let’s watch the Fed and how they affect inflation bonds together. 

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