Advertisement
investing

How Investors Can Get Out of a Low-Return Rut

A traditional stock-bond portfolio just might not hack it in the next few years, so retirement savers need to consider some outside-the-box investment strategies.

Bloomberg put a little scare into investors last October when it reported on a Research Affiliates study that found slim odds of making even a 5% real rate of return over the next 10 years with a traditional 60/40 mix of stocks and bond in your 401(k).

The story, “The Next 10 Years Will Be Ugly for Your 401(k),” was meant to be a conversation-starter. Should you increase your risk? Save more money each month? Change up your whole investment plan? Or should you, as the writer warned, “start getting used to disappointment”?

Advertisement - Article continues below

It’s an interesting topic, but hardly a surprise to anyone who has been following the markets.

Things have been awfully good for an awfully long time. Eventually, something’s gotta give — and it could be your bottom line.

The problem today with the ‘buy and hold’ strategy

A traditional stock-bond portfolio is meant to have a negative correlation: When stocks go up, bonds go down. Folks will tell you it’s Investing 101: You use one as a hedge against the other.

But both stocks and bonds are high right now — and it’s been that way for years. That’s making diversification more difficult.

Bond values are up, but yield isn’t.

The 10-year Treasury yield varies, of course, but let’s say for the sake of example that it’s 2.21% (the rate on June 6). If you’re yielding 2.21%, minus 1.6% inflation (the number used in the Research Affiliates report, although currently it’s in the 2% range), you’re looking at less than a 1% real rate of return.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

Beyond yield, the only way to enhance the return on bonds is through capital appreciation of the bonds. Almost always, the sole reason bond values rise is due to falling interest rates. We are currently in a low-interest rate environment, and it appears interest rates are more likely to rise over time, as opposed to declining. So, if interest rates rise, bond values could fall, potentially bringing the total return on bonds into negative territory.

As for stocks — we’re in the second-longest bull market in history. But the length of a bull market doesn’t necessarily mean as much as the valuations of the stocks. And right now, the market certainly isn’t cheap.

Various websites (including Multpl.com, which offers monthly numbers) are reporting the price to earnings (P/E) ratio as somewhere between 25 and 26.5. That’s only happened a few times in history: P/E numbers were this high during the 2008 crash and during the Internet bubble of 2000. When stocks are wildly overpriced, it often means the market is due for a correction … or a more dramatic fall. It’s unlikely it can continue at this pace for the next 10 years.

Advertisement - Article continues below

Put this all together, and it means the traditional buy-and-hold, passive investing strategy of loading up on U.S. stocks and bonds isn’t likely to net a significant return over the next six or seven years.

Some alternative strategies

So what can you do?

  • Instead of relying on passive management, look at tactical strategies that don’t rely on just following the market. For instance, sector rotation or momentum investing can take advantage of trends in the market. Identifying these trends and investing accordingly can often lead to enhanced returns.
  • Consider moving some money to markets with cheaper valuations. The Research Affiliates data has international and emerging markets outperforming U.S. markets, strictly because they’re less expensive. But if you do that, you’ll likely take on more risk, so …
  • Balance those moves with other non-traditional investments, things you don’t see in the typical 60/40 stock/bond portfolio. For example, preferred stocks have a decent yield that could offset the effects of rising interest rates; if you hold on to them, they can create a good amount of income. Real estate and commodities tend to move in different ways than the market — they don’t have the same correlation as bonds to the market.

Talk to your financial professional about these and other strategies that could steer your portfolio around a low-return rut. There are still ways to make money out there — you just have to look outside the box of conventional stock/bond investing.

Kim Franke-Folstad contributed to this article.

Investment advisory services offered through CoreCap Advisors, Inc., a federally registered investment advisor. Wealth Trac Financial and CoreCap are separate and unaffiliated entities.

Advertisement

About the Author

Kurt Fillmore, Investment Adviser

Founder and President, Wealth Trac Financial

Kurt Fillmore is founder and president of Wealth Trac Financial, an independent financial services firm based in Bingham Farms, Michigan, specializing in customized wealth management and retirement planning. He is an Investment Adviser Representative and licensed insurance professional.

Advertisement

Most Popular

18 Things You Can't Return to Amazon
Smart Buying

18 Things You Can't Return to Amazon

Before tossing these items into your virtual shopping cart, be sure to read Amazon's return policy first.
September 17, 2020
Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
September 18, 2020
7 Foreign Countries Luring Americans to Work Abroad During the Pandemic
careers

7 Foreign Countries Luring Americans to Work Abroad During the Pandemic

Work remotely – really remotely – in these appealing destinations offering special visas for American workers.
September 18, 2020

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
Insurance for Long-Term Care at Home
retirement

Insurance for Long-Term Care at Home

In the wake of COVID-wracked nursing homes, increasingly more people are looking at options to age in place with long-term care insurance.
September 17, 2020
A Step-by-Step Guide to Being an Estate Executor
retirement

A Step-by-Step Guide to Being an Estate Executor

Whether you’re planning ahead for your own heirs or have been asked to serve as an executor of an estate for someone else, it pays to understand what …
September 17, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020