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Preserve Your Retirement - The Death of the 60/40


Today a huge percentage of our population are individuals that are either retired or nearing retirement.  Many of them are spending more and living longer, which means both capital growth and preserving one's portfolio are crucial for a successful retirement.  This hasn't been a problem over the last few decades as investors had the tried and tested 60/40 portfolio to rely upon. 60% stocks and 40% bonds for years has functioned as the standard asset allocation for investors looking for growth combined with protection.

In today's environment however, this 60/40 allocation that once protected investors, may prove to be far riskier than many investors understand. This could lead to some pretty shocking retirement surprises, which is something we'd like to help investors avoid.

What is the 60/40 Portfolio?

The 60/40 portfolio was born almost 91 years ago, and for most of those years, it did the job it was intended to do.  Over that particular time period, an all stock portfolio (S&P500) would have returned you an average of 9.5%.  However, the 60/40 portfolio would have provided investors with a very respectable return of 8.1% a year, but with 40% less volatility!  The most redeeming quality of the 60/40 portfolio was its ability to balance growth with protection. It was stable, and investors could count on it over long periods of time.  During that time frame, there was never a 10-year period where the 60/40 portfolio lost money.[1]

Traditionally stocks have been viewed as a portfolio's growth engine and come with higher expected returns but also with more volatility.  Bonds have been sold to investors as 'safe investments'.  What allowed the 60/40 portfolio to do so well has been the mostly negative correlation between stocks and bonds over this period in history.  Negative correlation means the assets moved very much in the opposite direction of one another.  When stocks did poorly, investors were able to count on their bond positions to maintain value and vice versa.

Holding Bonds as Protective Assets Won't Cut it

Unfortunately, in today's environment, interest rates are at all time lows which means even a slight increase in rates could be disastrous for the bonds investors are holding as their safe and protective assets.  This historically negative correlation of stocks and bonds that has provided the 60/40 portfolio its ability to offer investors respectable growth with less fluctuations seems to be breaking down. For investors this means that holding only bonds as protective assets just won't cut it.

In today's environment, a 10-year Government of Canada Bond is paying a measly 0.56%. Bond prices are inversely related to interest rates, meaning that if interest rates go up, then bond prices go down, sometimes drastically so. If we take a look at what a 2% rise in interest rates would do to the value of this bond today, I've ran a quick present value calculation which suggests today's 10-year Government of Canada would lose nearly -18% of its value.  Not necessarily what most retired investors have come to expect from their 'safe' holdings.

Looking into Different Asset Classes to Reduce Portfolio Fluctuations

Before you laugh at me assuming a 2% increase in interest rates, it's worth noting that in October of 2018, a 10-year Government of Canada Bond was yielding 2.6%![2] For retirees, depending on when they need to withdraw their funds, returns like the one mentioned above could mean a significantly reduced retirement lifestyle. For others it could mean heading back to the workforce on either a part time or full-time basis. Something no retiree wants to be forced into. So, what can investors who are retired or who are approaching retirement do? Investors who are looking for growth and want to preserve their portfolio will need to look to different types of asset classes to help reduce portfolio fluctuations.

Living an Enjoyable Retirement

At Endeavour Wealth Management, over the last several years we've been increasing our client's exposure to market neutral funds which are designed to have little to no correlation to the returns of the stock market.  The particular market neutral strategy we use, aims to provide a long-term average return of 5% per year regardless of what the market does.  We tell our clients it's not a 'make you wealthy' strategy, it's meant to keep you wealthy. And for most of our clients who are nearing or are at retirement, their primary concern is staying wealthy and living an enjoyable retirement.  

I'd encourage anyone who has similar concerns to reach out for a second opinion on your portfolio today.  Our team would be happy to help.

- Brandt Butt, Investment Advisor, CIM

Brandt Butt is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.



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