There is another major problem with allocating 75% to 90% of a retiree's assets to bonds. Many like Fuss believe we are entering the embryonic stages of what could well be a secular, multi-decade bear market for fixed-income securities. How severe that bear market will be is the big wild card.
But if you had asked a retiree who bought 30-year AT&T bonds in 1964 how they felt in 1980 when those securities were trading below 50 cents on the dollar, their answer probably would not be very different from a person who retired in early 2000 on the strength of their Cisco and Lucent shares.
Tellingly, Fuss adds that the Loomis Sayles Strategic Income Fund, a balanced fund focused on income with a mandate to invest up to 35% of its assets in equities, began increasing its allocation to the asset class from 3%. As of mid-September, stocks represented 12% to 13% of assets and Fuss says it is possible it might reach the 35% limit.
For advisors, the post-Lehman bankruptcy environment remains challenging. Depending on the client, more than a few have scaled back their allocations to the 40% to 55% area, often substituting commodities rather than fixed-income securities.
With Europe tottering on the verge of a continentwide recession and the rest of the globe experiencing a slowdown, commodities are facing short-term headwinds. Even if the boom in emerging markets brightens the outlook for metals and agricultural goods later in the decade, the long-term historical performance of commodities is hardly sterling.
With so much uncertainty, the smartest decision may simply be broad diversification. Financial Advantage president J. Michael Martin, whose writing has often graced these pages, may not be a perma-bear, but he's certainly no starry-eyed bull. Clients in his firm's accumulation and core portfolios currently are targeted at 50% and 30% equities, respectively, and that's after a major cutback in stocks on August 1. Both portfolios have 10% of assets in gold.
"Long term, I think that owning well-managed businesses is by far the best way to invest because, unlike bonds, businesses can adapt to all the vicissitudes of economic change and government policies," Martin says. "But since stock prices change dramatically, we have to pay close attention to what we pay for businesses."