To read more on the topic of Retirement Planning, heres the link I mentioned in my video by the The Motley Fool, click here.
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There have been lots of articles on line recently saying that the traditional 60/40 portfolio is dead and that investors need to rethink their strategy.
This has been largely due to the sudden rise in treasury yields causing bonds markets to experience volatility.
However, we’re talking about a strategy that has held firm for longer than most investors have been alive, so should we just drop it after a few weeks /months of rising treasury yields?
My view is ‘no’.
Remember the following?:
- Inaction is often the best course of action
- History is not necessarily a guide to the future, but the world has been through economic shocks before
- The 50/50 chart we have looked at previously shows that time is your friend
- Don’t try to time the market
Scorned 60/40 Model Finds Allies in Biggest Test Since 2016
By Emily Barrett
The 60/40 portfolio saw investors through the cataclysm of the pandemic. The global recovery is now proving an even tougher test.
The strategy — an investing stalwart since it arose from Harry Markowitz’s Modern Portfolio Theory about a half-century ago — was already under pressure from the historic decline in bond yields. But the sharp move in the opposite direction is a more immediate threat, as recent market volatility has triggered tandem declines in stocks and bonds.
That jeopardizes the relationship at the heart of 60/40, which relies on the smaller, fixed-income allocation cushioning losses when riskier assets slump. The prospect of a faster economic recovery due to vaccines and heavy government stimulus has hit bonds hard, driving yields up at a speed that’s roiled equity markets. The method now faces one of its most severe tests since 2016, when U.S. President Donald Trump’s election raised expectations that lower taxes and lighter regulation would turbo-charge growth.
Portfolios based around 60/40 performed in 2020, with Bloomberg indexes tracking global and U.S. models providing returns of 14% and 17%, respectively. That hasn’t silenced calls to rethink or abandon the strategy, which mounted after losses in 2018. Cathie Wood recently suggested adding Bitcoin as a hedge against inflation.
Still, the strategy has some prominent defenders.
“If anything, the selloff you’ve seen year-to-date gives you a better entry point for fixed-income in portfolios,” said Erin Browne, multi-asset portfolio manager at Pimco in Newport Beach, Ca. “I don’t think by any means that the negative correlation between stocks and bonds has disappeared, or made bonds less relevant in multi-asset portfolios.”
The performance this year underscores the strategy’s resilience. The euro area, Japanese and Canadian 60/40 strategies tracked were up 3% or more year-to-date as of March 15. The global and U.S. indexes were both up more than 1.5%.
“We’re not talking about what’s the best possible return on your money — that’s another conversation,” said Kathy Jones, fixed-income portfolio strategist at Charles Schwab in New York. She pointed out that a balanced portfolio is defined as capital preservation, income generation and diversification from stocks and other risk assets.
Inflation Link
The correlation that matters is the tendency of bonds to weaken, driving yields higher, as stock markets climb — and vice versa. That positive link between yields and stocks has held since the turn of this century with only minor interruptions, in large part because of benign inflation.
That relationship would only break down if there’s a regime shift in inflation expectations, which major central banks have succeeded in keeping anchored for decades, said Brian Sack, director of global economics for the D.E. Shaw Group. The firm threw its weight behind the hedging power of Treasuries in a paper released last month.
IMG
The paper argued that U.S. government securities acquitted themselves well in the big test of the risk-asset drawdown in March last year. German and Japanese bonds were less effective, because their sub-zero yields created a situation where they were “meaningfully impaired as hedging assets.” A similar fate is looking less likely for Treasuries after recent volatility steepened the U.S. curve, Sack said.
“The rise in yields, if sustained, would provide more room for yields to fall in the future in response to a negative shock,” he said.
So why don’t you save enough? It is not just you, it is a global phenomenon – consumers like to consume and many of them consume more than they need to or should.
Is it a lack of financial education? Is it the belief that it can simply be done later in life and worrying about it now is not appropriate? Does it stem from the cultural expectation that the firm that we work for is taking care of it through our pension schemes and, therefore, it is not something for us to worry about?
Either way – IT IS SOMETHING THAT WE NEED TO WORRY ABOUT! So much so that the UK Government has a team that try to think up innovative ways to encourage people to save regularly. This makes sense if you think about it logically – Governments know that the people do not have enough put away for their future, they know that the average age of death has increased markedly in the last 20 years or so and they know that if the people do not fund the latter stages of their life themelves then it is the Government who may end up footing the bill. So it is in their interest to encourage you to save now.
But there is more to it than that. What about your own motivation? The below article looks at different cultures and saving habits and considers why many of us seem to struggle so much with it in the West, whereas, in other parts of the world, it is an expected norm. Perhaps we need to change our ‘norms’.
I regularly sit with people to discuss this very topic. Ask yourself – ‘if somebody had removed GBP 100/$100 from your bank account every month over the last year what impact would it have had upon your standard of living?’. In the UK, where I live in Dubai, and many other parts of the globe the answer in a lot of cases would be ‘zero impact’. Yet somehow that money still gets spent instead of being saved.
The obvious solution is discipline, habit and changing a culture – none of which is actually easy to do. For me, the best way of doing it is to make sure that on the 1st of every month a direct debit occurs for a set amount into a savings account. I set up all my bills to go out on the same day and I consider my savings as a bill – it is ‘paying myself first’. Whatever is left is then there to be enjoyed/lived on.
Hot Tip – sit down and write an effective budget. Consider all of your monthly, quarterly, biannual and annual bills and tally them all up. Be realistic, it is important to include holidays, entertainment and even a 10% miscellaneous otherwise you will not adhere to it. Then divide by 12 to see what your actual monthly expenditure is. Hopefully it is less than you earn which would generate a surplus. Then get that direct debit set up for just 25% of that surplus to go away each month and have a look at how much your life has been impacted 12 months later. You will probably find that you won’t have even noticed it. Over time you can then, perhaps, begin to increase the 25% figure.
If you would like any advice on great savings vehicles to use or anything of that nature then do not hesitate to get in touch.
Why a timely nudge might help us save money
By Kevin Peachey Personal finance reporter
Anyone struggling to save money might take inspiration from labourers in rural India.
These low-paid construction workers took part in an experiment. When they were paid, some of the cash was put into one envelope, or two, and earmarked as savings.
The stakes were raised for some when a picture of their children was attached to one of the envelopes.
Dipping into those savings for everyday spending – by ripping through the image of their sons and daughters – made them feel guilty. So, as they tried to avoid this guilty feeling, the amount they saved increased.
Can’t save, won’t save
This is more than just a theory. In the UK today, millions of people set money aside in a separate savings account to stop them spending it day-to-day.
Financial technology companies such as Wagestream, which allows workers to extract pay and save directly from their wages before payday, are trying out the use of reward and guilt.
It allows users to load an image of their savings goal onto the app, such as a car or a holiday destination. The more they save, the clearer the image becomes. If they withdraw money, the picture starts to disappear.
“It subtly reinforces the reality of what they are doing and can materially influence their behaviour,” says Peter Briffett, co-founder of Wagestream.
The reality, and the concern for many, is that the UK has lost its savings habit. This graph shows that experts are not expecting it to return any time soon.
The proportion of income left after taxes that we save is known as the savings ratio. For the last couple of years, the UK has saved about 4% of disposable income. In the 1990s, it came close to 15%.
The independent Office for Budget Responsibility (OBR), which makes forecasts for the government, predicts it will stay at or around this 50-year low for the next five years at least.
It is not all bad. The OBR, the Bank of England, and others expect interest rates to stay low too. Many people are deciding to pay off debts when the costs are low, rather than save when the rewards (in interest payments) are low too.
- Half of twenty-somethings have no savings
- Do money apps make us better or worse with our finances?
However, the Institute for Fiscal Studies says the increase in consumers’ spending has outstripped any income growth in the last couple of years.
A lack of savings has real consequences for the lives of millions of people – particularly the young and low-paid.
No savings means no financial buffer for the unexpected – no way to pay when a deposit is needed to rent a home, or when the vet’s bill lands after the cat is ill. or when the car breaks down. No car may mean no job.
Data shows the extent of the problem:
- Official statistics reveal half of 20-somethings have no savings at all
- Research by the Financial Conduct Authority found one in six people could not cope with a £50 rise in monthly rent or mortgage costs
- In 2016, the Money Advice Service found that 16 million people in the UK had savings of less than £100
- In Northern Ireland, the West Midlands, Yorkshire and Humber, North East England and Wales, more than half of the adult population had no more than £100 tucked away
Free money offered by the government has done little to reverse the situation. The Help to Save scheme offers a 50% bonus to certain people on low incomes if they save for two or four years. Take-up has been below half the level expected by the OBR.
So MAS, now called the Money and Pensions Service, wanted to find new ways to encourage people to save. It turned to the Behavioural Insights Team (BIT), commonly known as the “nudge unit”.
In a tiny meeting room, one wall of which is entirely a whiteboard, sits someone with big ideas. Elisabeth Costa, is a director at BIT and leads a team of five trialling various projects aimed at encouraging those who are in work, but financially squeezed, to save.
A total of 244 ideas about savings, guidance, and managing debts were thought up, before 17 were chosen for trials.
In the end, many boil down to this: using timely reminders and automatic technology can help people manage their finances.
We “underestimate behavioural factors”, she says, which can be as powerful a motivator as, for example, an increase in the interest paid on savings.
“The industry should make [customers’] decisions as easy and as automated as possible,” she says.
We make big changes at important times in our lives, so we might review our finances when we move home, or when children are born.
Yet reminders can work on a more regular basis, if they are well-timed, according to Ms Costa. Research in Mexico showed three-quarters of workers whose wages were paid into their bank account immediately took the money out in cash. They received a message on pay day urging them to keep it in.
- BBC News has set up a UK Facebook group all about affordable living. Share your ideas and join the conversation at the Affordable Living group here.
One trial being planned in the UK is at supermarket check-outs, both physical and for online shoppers. The idea is that the shopper receives a message at the check-out asking whether they would like the equivalent of money saved from store discounts to be diverted automatically into a savings account.
The team also plans to test the same theory with longer-term savings. This would prompt people to save some of their wages into a “sidecar account” alongside any pension savings. Employees would contribute in the same way as a pension, but the extra would go into a more easily accessible savings account for a rainy day, or to pay emergency bills.
Other trials are planned or already in operation to help people pay off debt quicker, or block spending on gambling sites.
Prizes at the end of the tunnel
Ms Costa explains that when it comes to finances, people often display “tunnelling” behaviour, when their short-term decisions clash with their long-term interests. For example, someone squeezed for cash may borrow a payday loan rather than save the same amount by switching to a cheaper energy deal.
We also tend to value rewards that are offered today rather than in the long-term.
That is why prize-linked savings accounts are popular. One study in South Africa found savings increased by 38% when people were offered the chance to win a cash prize rather than being paid interest.
In the UK, Premium Bonds have been attracting people in much the same way for 60 years. It is the most popular savings product in the country. Yet, Ms Costa argues that for some people on low incomes, the £25 minimum investment may be too expensive.
Many will argue that the financially squeezed need a little more help, as well as a little more luck.