A portfolio designed for the next decade | Financial advisors
This November 9 marks the 402n/a anniversary of the first sighting of Pilgrims on the New England coastline. And while Plymouth, Massachusetts was not the initial destination choice for the Mayflower passengers – it was in fact northern Virginia – their journey to America was marked, among other things, by remarkable courage, a curiosity and a willingness to adapt quickly to their new environment.
At first glance, the investment landscape for financial advisors today seems characterized by more problems and less promise. The current investment landscape includes both high inflation and the low likelihood that we will emerge from Federal Reserve rate hikes – five and counting so far this year – without any economic downturn.
Beyond these gray clouds, however, there remains an investment ecosystem that is generally resilient and often thrives on innovation and adaptability. According to data from Bloomberg, Lipper and BlackRock, the 10-year rolling returns of large US S&P 500 companies have been positive nearly 95% of the time from 1931 to 2021. financial advisors can approach portfolio construction for their clients with a little more optimism. Here are three investment strategies that can help your clients over the next decade:
- Speak the language of investors.
- Don’t give up on 60/40 just yet.
- Look for alternatives.
Speak the language of investors
Speaking of strategies, did you know that investors have preferences for how they like to discuss their investments with financial advisors? According to field research conducted by Invesco Consulting and Maslansky + Partners, 40% of investors prefer the word “strategy” to “solution” when it comes to conversations about investment management. The word “solution” conveys a problem to investors. On the other hand, the word “strategy” sounds more constructive for investors.
It is also important to develop investment strategies that reflect investor feedback. According to a new study from the Transamerica Center for Retirement Studies, 56% of American workers say saving for retirement is their top financial priority.
In a 2022 BlackRock survey, 64% of American workers say they are concerned about not having enough savings to last through retirement. And 80% want help getting through retirement, not just getting there.
Don’t give up on 60/40 just yet
This year, the Federal Reserve has sought to reduce inflation with five successive rate hikes; we now have an effective federal funds rate in the range of 3% to 3.25%. And whenever the Federal Reserve raises rates, it usually creates volatility in the market. In fact, through September, we’ve seen the worst stock and bond market performance since 1969, with the S&P 500 down nearly 24% and the Bloomberg US Aggregate Bond Index down about 15%.
For near-retirees and retirees who will need both income and growth from their investment portfolios over the next decade, this kind of market volatility has raised additional questions about whether the traditional framework of around 60% in stocks and 40% in bonds still makes sense. . After all, stocks and bonds are often highly correlated and move in the same direction during times of high inflation, which diminishes bond hedging protection if stocks turn sour.
Still, Fran Kinniry, director and head of Vanguard’s Investment Advisory Research Center, believes the 60/40 approach to investing has a viable role: “Balanced portfolios have had an incredibly difficult year, and the Vanguard’s view is that a recession is likely within the next year, however the onset of a recession is usually accompanied by rising bond prices and falling yields, particularly at the tail end. the longest in the maturity spectrum.This could mean that fixed income securities will resume their role as a buffer for equities.
However, risks abound on both sides of this paradigm. Sure, stocks can be volatile at times, but what if a retired investor misses out on the growth they might need over the next decade – especially one that preserves the power of buy – by not having enough stocks in your portfolio? Kinniry adds, “In challenging market environments like these, portfolio performance can be stressful, but the trade-off with temporary emotional discomfort is the greater likelihood of hitting long-term return goals. Although the future does not represent the past, since 1928 a balanced 60/40 portfolio has never had a 20-year period with negative real returns.”
Vanguard revised its 10-year outlook in October for core assets across the world:
|Asset class||Projected return over 10 years|
|US stocks||4.1% to 6.1%|
|US bonds||3.1% to 4.1%|
|Non-US stocks||6.6% to 8.6%|
|Non-US Bonds||3.0% to 4.0%|
|US real estate investment trusts||3.9% to 5.9%|
|Cash||2.6% to 3.6%|
Adam Hetts, Global Head of Portfolio Construction and Strategy for Janus Henderson Investors, adds: “A portfolio built for the next decade should be driven by the paradigm shift we are witnessing this year. Since the global financial crisis of 2008 we have had to struggle with rock bottom interest rates and a world dictated by TINA – There is no alternative (to equities). reasonable to equities in fixed income, but a broadly diversified equity investor should reconsider many of the stocks that have fallen out of favor in recent years, including many of the generally more common value-oriented and high-dividend stocks outside the United States. In an environment of persistently high inflation, equity investors do well to remember that the majority of real equity returns have historically been driven by dividend yield and dividend growth.”
Look for alternatives
Others, like Rob Almeida, global investment strategist for MFS Investment Management, point to potential headwinds for equity returns over the next decade. He says: “Monetary policies help reduce aggregate demand (i.e. inflation). Higher costs – capital, labor, even ESG-related – combined with a higher bill of capital investment that is several years behind will result in a very different, likely lower profit margin structure compared to the previous decade Companies unable to both absorb what will be higher structural costs and a return to pre-COVID 19 economic growth will struggle to meet investor expectations.
Perhaps that’s why alternative investments are starting to gain traction among financial advisors. According to Cerulli Associates, financial advisors currently allocate 14.5% of the investment portfolios they manage to alternatives of some kind. Alternatives used by financial advisors now include liquid alternative mutual funds (68%); unlisted REITs (61%); private equity (41%); and private debt (39%).
Beyond the potential for above-average returns, alternative investments can also help investors achieve greater diversification. Alternative investments often have low correlations with stocks and bonds.
A potential downside is that alternative investments typically have higher expense ratios than more traditional investments, such as equity mutual funds and exchange-traded funds, or ETFs. According to the United States Securities and Exchange Commission, “many alternative mutual funds have annual fees equal to 2% or less of fund assets.” By comparison, Morningstar reports that the asset-weighted average fund fee for mutual funds and ETFs is now 0.40%. In fairness, however, some of the higher costs of alternative investment strategies relate to things like due diligence on private companies, investments with liquidity constraints, and overall risk control.
A lot has changed in the investment landscape this year, and not all of it has been negative. The 10-year total return outlook for bonds, for example, has nearly doubled this year to over 3%. Why is this important? For an investor who needs a 5.5% total return to support his retirement income needs over the next decade and beyond, bonds can now help do the heavy lifting in the portfolio. . In normal market times, bonds are less volatile than stocks. This dynamic also enables broader portfolio conversations regarding potential excess returns from other asset classes over the next decade.