Portfolio managers who have traditionally used a 60/40 equity-bond split for their clients say now is the time to consider investing more in fixed-income securities to weather volatility and economic weakness ahead . Both asset classes had a difficult year. Bond yields have rebounded lately and some segments of the market are showing strong returns for investors. Yields move opposite to bond prices. “Bonds are more attractive than they have been for some time, probably for over a decade,” said Barry Gilbert, asset allocation strategist for LPL Financial, adding that they have the most makes sense for investors who are more conservative or looking to increase their income. in their wallet. At the same time, equities have been volatile and should continue to run wild. This has already prompted investors to sell riskier assets in exchange for the safety of fixed income securities. The ratio of stocks to bonds has fallen since mid-August, Credit Suisse analyst David Sneddon wrote in a note on Monday. “This suggests that we may be seeing a more decisive decline and a longer lasting downtrend as investors move further away from equities and finally start to turn to bonds, with the downtrend in equities itself ahead. accelerate,” he said. Which Bonds Make Sense The threat of a potential recession is driving the move into bonds, especially as high inflation and Federal Reserve rate hikes weigh on equities. “We believe equities still have room to fall, especially as earnings are more at risk in a recessionary scenario,” said Michael Reynolds, vice president of investment strategy at Glenmede. In such an economic environment, an underweight to market risk makes sense. It also makes sense to look to fixed income securities for some protection. Historically, bonds mitigate the risk and dampen the volatility that stocks typically experience. While this has been a tough year for both asset classes, that hasn’t changed that fact, according to Anthony Saglimbene, chief market strategist at Ameriprise Financial. “What has changed this year is that earnings look more attractive now with yields picking up,” he said. “When you start getting 4% over two years and almost 4% over 10 years, those are attractive returns.” Currently, the yield on the two-year US Treasury note is around 4.14%, while the yield on the 10-year note is 3.75%. Shorter duration bonds are currently popular with investors due to these higher yields. For example, one-year and three-year US bond yields are above 4%. “Right now, we’re putting our overweights in shorter duration fixed income,” Reynolds said. “We are also less exposed there to rising interest rates.” He noted that the company’s sweet spot is in the two- to three-year range because that’s where they find the best value. Those with more bonds in their portfolio would want to rely more on the shorter end of the yield curve for the most protection and income, according to LPL’s Gilbert. However, investors with a more traditional 60/40 split would probably want to stick with a duration of around six or seven years, he said. Of course, if there is a recession in the next few years, there will come a time when it makes sense to further strengthen bonds and seek investments further down the yield curve. “In recessionary environments you want to have a bit of duration and if interest rates go up you can get a big payout on those bets,” said Reynolds of Glenmede. Now, he noted, that bet is a little premature because interest rates are likely to go a bit higher. Other Fixed Income Sectors Admittedly, investors may be wary of bonds, as they too have been hit hard this year, leading to price declines on both sides of the 60/40 portfolio. For those looking for income but don’t want to gamble too much with bonds, there are other options, according to Rob Burnette, CEO and financial adviser at Outlook Financial Center in Troy, Ohio. This includes blue-chip stocks that pay solid dividends like IBM or are considering other investments like preferred securities or structured notes. Preferred securities are fixed income instruments that hold certain qualities of stocks and bonds and generally offer higher yields, while structured notes are debt securities issued by financial institutions. It may also be a good idea to have a larger reserve of cash on the sidelines, ready to be reinvested in stocks. “It’s nice to have some dry powder on the sidelines in an environment like this, you never really know what kind of opportunities will come up,” Reynolds said. Now may also be a good time to buy stocks and bonds now and get back to a 60/40 split, Gilbert said. “You should look for opportunities when you feel the most uncomfortable,” he said. Rebalancing might be a good idea Investors who want to position themselves appropriately for the coming months may not have much to do to align their portfolios, given the massive sell-off in stocks since the start of the the year. Still, it makes sense to regularly reassess the balance of bonds, stocks, and cash to make sure your allocation meets your goals. Many investors may find that even if they haven’t made big gains this year, they are still poised for long-term success and shouldn’t make emotionally-driven changes. “A well-diversified portfolio continues to be the best way forward for investors,” Saglimbene said.
