January Market Update – The 60/40 Rule is Dead


As we just finished 2022 And now are going into 2023, it’s a good time to reflect. Be sure to check out our full market update in the last Power Hour.

The real story from 2022 was that it was an unusual, perfect storm where stocks and bonds both had negative years. Not just negative years, but the worst performance combined recorded in history.

Why that is important, is because of the 60/40 portfolio. You’ve probably heard or been told that a 60/40 portfolio, 60% stocks or equities, 40% bonds or bond funds, is a conservative and good retirement portfolio, However, the 60/40 portfolio just had the worst year on record.

Now you’re seeing lots of things out there about that 60/40 portfolio is dead, we have been talking this for years already. Really, it’s just it’s broken and needs to be rethought.

I just read in Morningstar that the 20 largest bond funds all posted their worse year in history. Many of these are in your typical portfolios and used in target-date funds. The 20-year treasury was down 27%. If we look at an aggregated bond index, it’s down about 13% for 2022.

Anywhere between -13% and -20%, is what some of these bond funds are down, which is huge when that is supposed to be the safe or secure part of your portfolio.

So the question is if it’s broken, what do you need to do?

There was some research done a few years back by Roger Ibbotson, PhD and Chief Investment Officer of Zebra Capital Management, looking at this exact thing. When interest rates are low, which we had for years, the bond portion wasn’t making much. Now, when interest rates came up, bonds go down in value like a tetter-totter and took huge losses.

In this study, they look at using FIAs (fixed indexed annuities) as an asset class to replace bonds. They dove into a lot of historical data. In almost every scenario, using an FIA instead of bond funds performed better. It gave you a more stable ride.

We have known this and have been talking about it for  a while now, but it is now surfacing in more areas. I just saw a Kiplinger article where they were talking about the 60/40 portfolio being broken, and some strategies to fix it. They mentioned some money management strategies, which our team does (we’re going to be talking about that more on our next power hour in February).  But they also talked about using an indexed annuity in place of bonds.

Let me give you a quick synopsis of how that works. We have lots of videos on our site about annuities, here is a high-level overview.  In an FIA, your return is based on a major index, if the index goes up, you get a positive return, if the index goes down, you make zero.

Most index annuities made a zero last year, because almost every index, they could be tied to was down. However, when everything else is down double digits, zero is your hero!

What you can make on good years in an FIA has a lot to do with interest rates because of how these products are designed, which makes for better return potential now in FIAs with higher interest rates.

One way gains can be calculated is with a simple cap strategy, every year you can make up to the cap rate. In the past few years, 5% was a good cap rate, but now the cap rates are 9-10%. So if the market is up, you can make a cap of 10%, and that’s locked in, you can’t lose it even if the market goes down the next year. On a negative year, you make zero. It’s pretty easy to see how an FIA can easily replace the bonds and give you better performance and a more stable ride just the research found in the Ibbotson report highlights.

If you are in target date funds or if you have bond funds, and you’ve seen losses in your portfolio, it’s time to look at better solutions. Give us a call and we’ll talk about what might be best for you.

We serve clients in Mineral Point WI, Dodgeville WI, Platteville WI, Lancaster WI, Fennimore WI, Boscobel WI, Richland Center WI, Muscoda WI, Spring Green WI, Mazomanie WI, Sauk City WI, Middleton WI, Madison WI, Fitchburg WI, Verona WI, Mount Horeb WI, Barneveld WI, New Glarus WI, Monroe WI, Belleville WI, Oregon WI, Stoughton WI, Darlington WI, Cuba City WI, Hazel Green WI, Belmont WI, Dubuque IA, Freeport IL

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