RED BANK, NJ / ACCESSWIRE / June 15, 2021 / The purpose of investing is to grow purchasing power on an inflation-adjusted basis. Inflation affects every individual (and business) differently because saving and spending patterns vary so greatly. When saving for retirement, investors often begin the process by matching anticipated inflation-adjusted expenses with today's assets. Over time, those savings and spending patterns may change - the investments set aside to fund expenditures should evolve too.
What Has Changed?
In 1981, interest rates on 10-Year US Treasuries peaked after exceeding 15%. Fast forward to the heart of the COVID-19 pandemic in the summer of 2020 when rates dipped below 0.5% in 2020. Remember that as interest rates fall, Treasury Bond prices move higher. The journey was not a straight line, but it did establish a precedent that the 60/40 portfolio (60% Stocks / 40% Bonds), or some derivation thereof, is the standard by which many investment portfolios are to be managed. The logic seems sound: higher stock market returns boosted portfolio returns while the safe bonds lagged. Alternatively, Treasury Bonds could act as a portfolio ballast and a source of liquidity for investors in times of stock market weakness.
However, long-dated Treasury bonds fell alongside stocks in March 2020. The counterbalancing properties of long bonds failed to materialize as they had in the past which created a challenging scenario for capital allocators. This could have been a short-term anomaly brought on by severe market stress, but perhaps it wasn't. What if what we saw was not an anomaly but rather the makings of an altogether different macroeconomic backdrop unlike the past forty years? In that case, the very structure of the 60/40 portfolio itself may need to be reconsidered for some investors. If bonds are to act as an offset to stock weakness the same way they have in the past, interest rates would likely have to go deeply negative… while not impossible, it is seemingly unlikely. Perhaps the investment universe needs to be broadened to solve for this.
In Practice
If you've ever watched archive sports footage, it's fascinating to watch the game evolve irrespective of the sport. Methodologies, complexities, and reaction functions of participants are dynamic. The world of finance is not so different.
If asset markets are structurally shifting, asset allocators should contemplate how to evolve with them. The low interest rate environment has pushed investors into riskier corners of the capital markets and crypto-verse. Consideration should be given to an unwinding, or perhaps even a doubling down, of these popular trades and the subsequent ramifications across asset classes.
Armed with internet connectivity and a search engine, we all have access to an overwhelming amount of information. While much of it is free, there are still mountains of data hidden behind paywalls. Some "do it yourselfers'' may be intrigued by the learning process and decide to pay for the learning curve with free time and opportunity cost. However, errors in contextualization, application, and execution can be detrimental to success, particularly if those errors persist over time. Goals-based investing can prioritize successful outcomes over arbitrarily defined, volatility-based solutions which may not be appropriate given how the future may be different than the past.
The COVID-19 pandemic taught us that anyone in the world is only clicks away from a face-to-face meeting. This is an incredible opportunity for investors and advisors alike to access one another remotely and engage in a level of customization and collaboration once thought unattainable. It never hurts to have a seasoned professional give a second opinion on your finances so you can be sure your financial picture is evolving over time and not stuck in it.
The views expressed here reflect the views of Adam Potulski as of June 4, 2021. These views may change as market or other conditions change. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Ameriprise Financial cannot guarantee future financial results.
Diversification does not assure a profit or protect against loss.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
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Company Name: Ameriprise Financial Services, LLC
Contact Person: Adam Potulski
Address: 141 W Front Street, Suite 140, Red Bank, NJ 07701
Phone Number: 732.383.2299
Website Link: http://www.ameripriseadvisors.com/adam.potulski
SOURCE: Ameriprise Financial Services, LLC
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