Markets are primed 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 pullback from its massive stimulus program in July, and for rates to potentially rise in late 2022.
Others are sticking with the 60/40 strategy, which has delivered an annual loss only twice in the past 12 years.
“I wouldn’t think that it’s a good time to walk away” from an allocation that has “proven valuable over time,” said Todd Jablonski, chief investment officer for Principal Global Asset Allocation in Seattle. “There’s ways to enhance the 60/40 for retirees, or someone saving for this environment.”
One way is to shift components of the 40% portion to ensure retirees pocket a higher income. That could include increasing exposure to corporate bonds—which often offer more protection than shares—instead of traditional government debt.
Credit securities have gained 5.7% in the past year with an average yield of about 1.47%, more than double the 0.68% yield from Treasuries.
Josh Dalton, a financial adviser in Brisbane, suggests other alternatives that could be included in the mix, such as income-generating commercial property and infrastructure projects that are also less correlated to stocks.
“You have to look through the market hype and base your portfolio construction on your clients’ time horizon,” said Dalton, a director at Dalton Financial Planners.
For many, though, as the market heads into a less predicable, post-pandemic era, the best hedge may be to reconsider spending habits, or to pump 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 adviser at Hewison Private Wealth in Melbourne. “Sometimes that means not putting 40% into bonds in an ultra-low rates environment and creating a different wealth path.”
For the Griffiths, returning a chunk of their assets to bonds or cash is not high on the agenda.
“We drew down on our term deposits and we were finding better value elsewhere,” said Peter, whose investments now span dividend-paying shares to residential property. “It is a very tough environment.”
—With assistance from Matthew Burgess.
This article was provided by Bloomberg News.