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Is Fixed Income as Safe as you think?

Is Fixed Income safe?

Two studies suggest that the “conventional wisdom” may be flawed.

If you move away from equities with age, are you making a mistake? For some time, financial professionals have encouraged investors to lessen their exposure to the stock market as they get older. After all, a 60-year-old has less time to recover from a market downturn than someone decades away from collecting Social Security checks.

Is that conventional thinking flawed? It might be. It isn’t simply a matter of looking at the future; you may also want to look at the past.

What’s the price of playing not to lose? It could be significant, at least in terms of opportunity cost.

Obviously, bonds, CDs, and money market accounts will always hold some appeal as they tout protection of principal. Aside from that sense of safety, how does a 1% or 2% return sound? In spring 2016, the best rates on 5-year CDs are barely exceeding 2%, a far cry from the 5-6% yields of previous decades.1

While the Federal Reserve is now tightening monetary policy, interest rates are still near historic lows and will remain low for the near future. We have yet to see an inflation surge, even after years of easing by the Fed and other central banks.

Appetite for risk sent the Dow above 18,000 again in April. Yes, many investors moved money into cash earlier this year, but they may move it back soon if the major indices keep marching back toward their 2015 peaks.2

Is the “glide path” strategy overrated? You may or may not have heard of this term; it refers to a gradual adjustment in asset allocation across an investor’s time horizon. With time, the asset allocation mix within the portfolio includes more fixed-income assets and fewer equities, becoming more conservative. (This is the whole idea behind target date funds.)

Some question this approach. Research Affiliates CEO Rob Arnott looked at 140 years of bond and stock market returns and concluded that a glide path investing strategy pushes people out of equities too soon. Wade Pfau and Michael Kitces, two highly respected financial planners, wrote a recent white paper saying that retirees may actually want to increase their position in equities as they age.3

Arnott ran hundreds of model scenarios with mock portfolios, using three different asset allocation strategies and an initial investment of $1,000. One approach mimicked a target-date fund: an 80%/20% stock-to-bond glidepath to start, then a gradual decrease in the level of equity investment. Another portfolio had a constant 50%/50% allocation thanks to annual rebalancing. A third had an inverse glidepath: a 20%/80% stock-to-bond ratio to begin, evolving gradually to an 80%/20% stock-to-bond mix. Arnott found that across stock market history, the target-date fund approach finished last. The 50%/50% allocation approach beat it by 11% over 40 years, while the inverse glidepath approach outperformed it by 22%.3

Pfau and Kitces think retired investors should always maintain their appetite for risk. In their view, investors should ideally retire with a small percentage of their portfolio in equities, and then allocate greater amounts of their portfolio to equities as retirement progresses, with the stock allocation eventually peaking at 70-80%. Purely in terms of investing, they argue that this approach gives retirees the best defense against outliving their money.3

As many people haven’t saved enough for retirement to begin with, they more or less have to stay in stocks as they retire. If retirees want suitable returns, accepting more risk may be essential.

Paul Lewis may be reached at 217-337-5584, paul.lewis@rfsadvisors.com, or you can get more stuff from us at www.paullewis.com.

Securities and Advisory Services offered through Triad Advisors Member FINRA/SIPC

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.


1 – interest.com/cd-rates/rates/?local=false&state=CA&market=&prods=19 [4/20/16]

2 – usatoday.com/story/money/2016/04/20/investor-optimism-not-flashing-danger-sign/83274212/ [4/20/16]

3 – wealthmanagement.com/retirement-planning/problem-glide-path [1/10/14]