Some good stuff in Barron's this week.
First the Streetwise column looked at whether the 60/40 portfolio is broken and suggestions from Bank of America about what to do if you think it is broken. I am a sucker for these types of articles. I have been leaning toward 60/40 being broken for years. First as a function of rates that were too low for the risk/reward tradeoff to make any sense and now I believe intermediate to longer term bonds have become sources of unreliable volatility.
Those are not new thoughts from me. The analyst cited by Barron's mentioned the track record of frequent positive correlations between stocks and bonds. Not always, but frequent, frequent enough to undermine the premise of using bonds to diversify equity volatility.
For purposes of this post, I would differentiate between fixed income products that by their nature (usually very short duration) don't go down in price, they are steady and just pay out a yield (carry), versus the types of bonds that got pasted in 2022 and would get pasted again if rates take another big leg up or go up in price like equities if rates run back down. The point of the 40 that is usually associated with fixed income, it to avoid equity beta. Bonds with any sort of duration haven't really offered that attribute for a while.
Here's a snippet of what B of A thinks would improve a 60/40 portfolio.
Preferred stocks have equity beta on the way down but not the way up as do convertibles. Yes, I know how they should work in theory during downturns but that doesn't really work out in the real world. Muni bonds may or may not be attractive (up to you) but they are not immune to going down in price when yields go up, just like any other long duration fixed income. To buy RSP now as outlined by B of A is pretty much a guess that the narrowness of the stock market of late will reverse or revert to some mean. That might happen now, it will happen eventually, but the timing of when is just a guess and owning RSP doesn't do anything for equity volatility, it is equity volatility.
If 60/40 is broken, then I believe the answer is to explore portfolio construction that blends correlations, actual negatively correlated assets or assets with no correlation to help smooth out volatility to the extent you want that.
Speaking of truly uncorrelated assets, Hugh Hendry was on Bloomberg kind of recommending Bitcoin. We've looked at Bitcoin quite a bit here, I 've owned some for a while. At times, its correlation to equities has been negative, at times positive and at other times it does whatever. Hendry seemed to prefer it over gold because he thinks it would be much more likely for Bitcoin to triple than gold, he thinks gold is too big. I believe in the asymmetric potential as I have been saying forever, it could go to a bazillion or zero so size accordingly. I do not believe it can be effectively modeled into a portfolio via back testing. Up 300%, down 80%, some think there is a cycle to it and maybe that has been the case, but relying on that is not something I would suggest.
Back to Barron's and an article about people kind of being forced into an early retirement, as a matter of circumstance like in their 50's. People can have bad luck with health or be unhireable after a layoff or who knows what else, stuff happens.
There were some anecdotes and some suggestions. There was a fairly antiseptic suggestion of cutting expenses and one a little closer to what we talk about here, "check your expectations." This was kind of about figuring out a Plan B but not in the sort of depth we go into here. There was one point on this part that I thought was helpful about expectations for salary when "forced" into a second career.
For some of us, our job no longer exists. As alluded to in the article, people in their 50's can be victims of ageism. One form of optionality that you can buy for yourself long before something like this happens is the ability to live on less than what you have been making. This comes from living below your means which allows for saving more money. Regardless of your income, a $4000 monthly nut is obviously much easier to manage that a $10,000 monthly nut even if you could have afforded that expensive of a lifestyle.
A low monthly nut opens a much wider range of ways to make a living without having to start taking from retirement savings as early as your 50's.
I'll close this by reiterating the need to prepare for adverse outcomes long before they might happen. Disruptions are much smaller if you don't have to start from scratch on everything.
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