Over the past few years, we have seen extreme volatility in the market and the worldwide economy, leading to significant changes in how advisors and investors view portfolio building. But one thing is clear: What worked before is no longer a feasible strategy going forward.
Traditional 60% stocks and 40% bond plans are not necessarily ideal for investors today. High-interest rates, high federal debt, geopolitical pressures, and market sentiment have changed the value of these popular assets.
In this article, we will cover the recent market changes, how popular asset classes are behaving in this new market, and potential strategies investors can use when adjusting their portfolios.
The end of an era
With the rising interest rates, long-term Treasury yields have hit their highest point in nearly two decades. If you have read the previous articles on bonds and similar fixed-income assets, you may remember that as interest rates increase, the value of these assets decreases.
This event locked investors in bonds to preserve the principle unless they sold early enough to minimize losses. Stock prices jumped as credit became more expensive. Combined with the volatility of the market and global economic pressures, we may be seeing the end of a “Golden Age” of market returns.
Despite scattered financial crises, the market made quick rebounds over the past 40 years and offered high returns. Years of near-zero interest rates enabled companies to use cheap capital, expand rapidly, and raise shareholder prices—regardless of long-term viability. Now, banks and businesses alike are strapped for cash, and investors are seeing smaller portfolio returns.
The problem many investors face is related to their mindset. The extreme upswings in the market over the last 15 years were not normal, historically. But some have come to expect that if they put money in, the market will go up.
In fact, many of the most popular stocks of the last two decades hinged on hype—the possibility of profit. WeWork, Uber, and other similar companies demonstrated exciting, innovative models that ultimately failed to show longevity. Shareholders saw their portfolio returns skyrocket during the bullish years, only to see their profits dwindle as reality set in for these companies.
For instance, WeWork shareholders saw a stock price as high as $130 in November 2022. Within a year, the stock dropped to $1.74. Those who failed to sell before the drop faced a significant drop in their portfolio value.
The market is likely reverting to its former pattern. Conservative rewards with frequent losses. Instead of 12% gains, investors will see a return of 6% to 7% returns.
The question for today’s investor is how to best position their portfolio for a new, conservative market.
Expected asset behaviors going forward
Before looking at potential strategies going forward, it helps to understand the top asset classes and how they are behaving in the current market:
- Stocks – Extreme volatility over the past few years has fostered a sense of uncertainty about the market. Economic anxiety has reduced investments as stock prices fluctuate, with many stocks and related index funds seeing lower returns.
- Bonds - While the interest rate boosts returns on bonds, the federal debt adds additional pressure on government spending.
- CDs – Certificates of deposit are one of the more attractive options, as the interest rates drive savings while reliable issuers provide a sense of stability. However, ensuring that the issuers are FDIC-insured is vital to protecting your savings.
- Real estate – The real estate market is cooling off from its 2020-2022 high. It still has the potential to offer high returns, however, these assets are illiquid and are not optimal for many investors.
Potential portfolio strategies
The accepted, traditional portfolio comprises 60% stocks and 40% bonds with regular rebalancing. Given the current market conditions, this will unlikely provide significant results for investors.
Rather, defensive and diversified portfolios may offer the most protection. There are a few different strategies investors can leverage to spread out the risk, even if that means lowering the reward. It is often better to preserve wealth in trying circumstances. The more value an investor can maintain, the more they will have to invest when the market settles.
Potential portfolio strategies investors are using today include:
- Rebalancing more frequently
- Exploring more types of asset classes
- Investing in short-term fixed-income assets, such as bonds and CDs
- Adding exposure to emerging markets
- Holding older bonds until maturity to preserve the principle
The years ahead
It is impossible to predict how the market will evolve over the coming years. Therefore, it’s often helpful to focus on mitigating losses rather than reaping rewards. Maintaining liquid assets and an emergency fund provides additional security for investors looking to weather potential storms.
It can be helpful to discuss finances with close family and advisors to ensure that you’ve covered all angles in your investment strategy. If you want a second opinion, you can book a call with founder Jon Green to discuss your portfolio or market concerns.
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