Peter and Lynette Griffith had two-thirds of their retirement savings in stocks during the 2008 financial crisis. By the time they stopped contributing to their pension fund last year, it was 100%.
” There is theSplit 60/40, or for us personally we had a 70/30 rule – 70% stocks, 30% fixed income – for a decent return, ”said Peter, a retired banker at Brisbane. “Those days are long gone. You just can’t live on income from term deposits or bonds anymore.
The Griffiths are not alone. Mom-and-pop retirement savers are abandoning the formula that has been the basis of pension plans for more than half a century, joining groups likeJPMorgan Asset Management. The catalyst was the pandemic, which brought down already low interest rates, reducing the income investors received from bonds. At the same time, jumps in cryptocurrencies andthe stocks even have attracted funds from some investors worried about missing out on big potential gains.
For savers in the United States and Australia – among the biggest DIY enthusiastspension markets – one of the main drivers of change came with the pandemic: breaking the underlying principle of the 60/40 formula that bonds should amortize losses when stocks fall.
Since the dot-com bubble burst in the early 2000s, there has been primarily a negative correlation between stocks and bonds. But at the height of pandemic nervousness last March, the two were sold at the same time. Over the past three months, they have recorded the strongest positive correlation of thiscentury.
It’s a bitter pill for those who have followed the “balanced” mutual fund mantra that was the gospel in the investment industry. Even though the 60/40 strategy has delivered 7% gains this year in the United States, financial advisers say many savings clients are abandoning the formula, especially the 40% bond component.
US Treasuries have lost around 3% this year, while benchmark 10-year bond yields have slipped from a post-pandemic high of 1.77% to around 1.48%.
“The modern retiree can now expect to live in retirement for 30 years and stocks have beaten bonds 98% of the time during that time,” said Sam Huszczo, founder of SGH Wealth Management in Lathrup Village, Michigan. “It’s hard to watch the stock market soar when 40% of your assets are moving slowly. “
The stocks are particularly popular in Australia, where nearly aquarter of the nation$ 2.4 trillion in retirement assets are controlled by DIY savers. The Griffiths, for example, point outfavorable tax treatments on stock dividends as well as on capital gains as reasons to love stocks.
The value of cash, term deposits and debt securities fell 6% since June 2017 to about A $ 160 billion ($ 123 billion) in March, according to data from the Australian Taxation Office. shows. Investments in foreign and Australian stocks rose 15% to around A $ 216 billion during the same period.
But the shift to a heavily equity-focused strategy could make retail investors vulnerable. Low bond yields and high stock valuations typically signal lower returns in the years to come. And while stocks may have risen over the past three decades, the first five years of retirement are crucial to preserving capital – a sudden crisis could affect retirees for the rest of their lives.
Markets are poised for the Federal Reserve to increase borrowing costs by April 2023 as the world recovers from the pandemic. In Australia, investors expect the central bank to announce a withdrawal from its massive stimulus program in July and potentially increase rates in late 2022.
Others stick to the 60/40 strategy, which has only generated an annual loss twice in the past 12 years.
“I don’t think this is a good time to move away from” an allocation that “has proven to be valuable over time,” said Todd Jablonski, chief investment officer for Principal Global Asset Allocation in Seattle. “There are ways to improve the 60/40 for retirees or for someone saving for this environment.”
One way is to shift items from the 40% portion to ensure retirees pocket more income. This could include increased exposure to corporate bonds – which often offer more protection than stocks – instead of traditional government debt.
Credit securities have gained 6% over the past year with an average yield of about 1.47%, more than double the 0.68% yield on Treasuries.
Josh Dalton, financial adviser in Brisbane, suggests other alternatives that could be included in the mix, such as income-generating commercial real estate and infrastructure projects that are also less correlated with equities.
“You need to look at the market hype and base building your portfolio on the time horizon of your clients,” said Dalton, director at Dalton Financial Planners.
For many, however, as the market moves into a less predictable post-pandemic era, the best hedge may be to reconsider spending habits or inject more money into savings to reduce the risk of volatile returns. as retirement approaches.
It’s about clients’ “goals and timelines”, said Chris Morcom, private client advisor at Hewison Private Wealth in Melbourne. “Sometimes that means not investing 40% in bonds in an ultra-low rate environment and creating a different path to wealth.”
For the Griffiths, returning some of their assets in bonds or cash is not a priority.
“We dipped into our term deposits and found better value elsewhere,” said Peter, whose investments now cover dividend-paying stocks in residential real estate. “It’s a very difficult environment.
– With the help of Matthew Burgess