Where we’ve been

When we look at the current economic and market environment and then glance backwards over the last 40 years, we can see we’ve been in a unique kind of setting when it comes to the economic environment.

The early 1980s had high interest rates and high inflation as we were moving out of a decade where we had extremely stagnant growth through the 1970s. While this was a challenge to the economy and markets in the 1970s, it set the stage for what was to come over the next 4 decades.  From that point we had generally lower tax rates[1], falling interest rates and inflation[2] all through the 1980s up until now and that has been supportive of steady economic growth as well as a strong overall stock market.

During this period, when we saw a disruption in the stock market your bonds were there to lessen the blow, and if you had a 60/40 stock to bond mix, you had a very good risk adjusted return over the last 40 years.  This has led many to believe that simply investing in a passive 60/40 stock and bond mix will continue to be an ideal allocation for diversified portfolios going forward.

Where we are

The problem is that a 60/40 portfolio will no longer cut it to provide the same risk adjusted return that it has in the past and with that we have moved from savers to investors.  To illustrate this, we can look back to 1995 and see that in order to generate a 7.5% expected rate of return, you could have invested 100% in bonds and had a pretty low level of risk, as measured by Standard Deviation.  By 2005, you had to have about 50% in stocks and 50% in bonds to achieve the same expected rate of return.  Fast forward to 2015 and you had to be at nearly 90% equities and 10% bonds for that same expected return of 7.5%. 

This has huge implications as more and more Baby Boomers move to retirement and are now relying on their investment portfolios to generate their income and have to maintain a much more aggressive portfolio to get the expected return they need to keep up with inflation and continue to growth the portfolio.[3]

As we have large market declines in the future like we saw in 2008-2009 or in March of 2020, and at the same time you are needing to take funds out of your portfolio to provide your retirement income, it is going to be harder for your portfolio to recover if a higher percent of your portfolio is in the market and subject to that volatility.

What we are doing

Our investment philosophy here at konvergent wealth partners is all about helping our clients construct portfolios that can weather all seasons. What this means, is we want to be able to make sure that no matter what is going on in the economic environment, we have components of your portfolio that are going to be working while others might not be, so combined all together it’s going to create a smoother overall ride for your investment portfolio.  

In upcoming posts to this blog, we will detail out how we construct portfolios for clients that can address these concerns through our All-Weather approach.

[1] Declining Tax Rates (Bradford Tax Institute)

[2] Real Gross Domestic Product (FRED Economic Data)

[3] 10-Year Treasury Constant Maturity Rate (FRED Economic Data)