An old investing rule of thumb is working better than it has in a while.
It’s called the “60-40” rule — which describes a portfolio made up of 60 percent stocks and 40 percent fixed-income securities. Advisors have recommended the balance as a middle-of-the-road way of investing. It puts the majority of an investor’s money into stocks, which are riskier but higher yielding than bonds, while still having a solid amount held in government, corporate and agency bonds.
The Vanguard Balanced Index fund
, which mirrors that portfolio rule, just had its best quarter in nearly a decade with a 9.5 percent gain in the first quarter.
The approach is usually more of a hedge. When stocks do well, it’s not typically the case that bond prices also rally. But this year has been different, thanks to the Federal Reserve.
The Fed signaled in January that it was putting the brakes on raising its short-term benchmark rates. Investors embraced the stance and bought bonds, pushing their prices higher as the yields fell. That also boosted stocks. Higher rates can sometimes dampen enthusiasm for stocks because rising borrowing costs eat into corporate profits and can make earnings valuation look too high.
Bond yields and prices move in opposite directions. In this case, lower yields means higher bond prices, and therefore more value for that 40 percent of an average investors’ “60-40” portfolio. With the Fed no longer a roadblock and the economy chugging along at a respectable 2 percent growth, U.S. stocks and bonds have both been in favor this year.
In other words, the quarter was “the perfect storm, in a good way” for investors, according to Paul Schatz, president at Heritage Capital.
“The rising tide of the first quarter has lifted all ships, debris and just about anything and everything in the ocean,” Schatz said. “The 60-40 portfolio was an easy winner.”
The other factor boosting U.S. Treasurys was how good they looked compared with the rest of the world. The German and Japanese 10-year government bonds, for instance, both yield negative interest rates. Any return looks great in comparison, especially for global investors looking for a place to park their money. The U.S. 10-year yields just under 2.5 percent.
“We might think of U.S. bonds as low income — but for the rest of the world it’s like a high yield bond,” said Ken Kamen, president of Mercadien Asset Management. “Worldwide demand is helping.”
The amount a retail investor should put in stocks versus bonds has a lot to do with their tolerance for risk and how close they are to retiring. Advisors often recommend that younger investors invest a greater portion of their money in stocks, or around 80 percent. Someone who is retired, on the other hand, might put 30 percent in stocks and have 70 percent in bonds.
Will it last?
Another rule of thumb advisors have used over the years is to subtract their age from 100. The remainder is the percentage of their portfolio that should be in stocks, some advisors say.
“It is the default for people, it has worked for the past 30 years and it continues to work,” said Rick Ferri, investment advisor and author of “All About Asset Allocation.” “It’s a pretty nice long-term allocation that outperforms most endowment funds for years, and is a tough balance to beat.”
Ric Edelman, CEO of Edelman Financial Services, said the fact that the 60-40 model worked so well is more of a reflection of the strong quarter than anything. The start to 2019 was a “a wonderful environment” for both stocks and bonds, he said. But that might not last.
“Sixty-forty has never not worked,” said Edelman. “But it’s unrealistic that the pace continues. We need to temper our enthusiasm.”
Based on the first quarter’s double-digit rally, if the S&P 500 stayed on the same growth trajectory, it would end the year up by more than 40 percent. Edelman expects that growth in share prices to retract, or slow at the very least.
Others are less excited about the old-school model, regardless of how great the quarter was. As money manager Peter Tanous put it — the 60-40 model is “dead.” Tanous, who has been in the business for 50 years, said there was a time when it worked great because bonds would kick back 8 percent.
“The problem is, that has not been true for a number of years,” Tanous told CNBC. In the prolonged low-rate environment over the last decade, “the 40 percent in bonds is sitting there ’doing nothing.”
“You need to look for other creative ways to create income, and you may need to take a little more risk compared to the old days,” he said.
Ever wonder why so many people are scared to talk about money?
Like, why is “money” a taboo topic that you should avoid talking about at all costs?
Even though…if more people were open to talking about money, our society wouldn’t have as many financial problems as they do today.
It’s because the majority of people don’t understand how money plays a part in their lives.
So…they avoid talking about money at all costs.
And then, they try to make you feel bad for being money conscious.
I don’t want you to be one of those people. Don’t live in fear, live with understanding.
The goal in life is to be happy…Not rich.
If you want to live a great life, you have to be (in this order):
1. Physically fit
2. Mentally fit
3. Spiritually fit (having a purpose)
4. Financially fit
I call this my Quadrafit Theory…
The very first step is to become physically fit.
If you are not healthy your only dream will be to become healthy. Nothing else matters.
When you’re in pain or on your death bed – the only thing you want is to get better.
You don’t care about how much money you have, what vacation you have coming up, or how many friends you have.
You just want to be physically fit. That’s your one and only dream.
But when you’re healthy, you can have 1000s of dreams.
That’s why the first step is to become physically fit.
The second step to living a great life is to become mentally fit.
This is your mental health.
If you’re depressed & miserable, making lots of money will not fix the way you feel.
Actually..It will make you feel even more miserable.
That’s why mental fitness is the second step to living a great life…
You can’t use money to compensate for your lack of mental fitness.
Third, you have to be spiritually fit.
Don’t confuse being spiritually fit with being religious. These are two separate things.
Being spiritually fit means having a purpose in life.
If you lack a sense of purpose…you will feel empty.
It’s like living your life in black & white – you’re missing the color.
You need to know your purpose for living life.
Ask yourself, what’s your reason for waking up in the morning?
What drives you?
You weren’t born just to go to work, pay bills, and die. You were born to thrive.
Finally, at the top of the Quadrafit Triangle is financial fitness.
You can be super healthy, surround yourself with amazing people, and do something you love…but if you’re drowning in debt and struggling to pay your bills…
Your happiness will dwindle.
1. Every time you go out with your friends, you’re worried about the cost of the bill.
2. You get into fights with your spouse because of their spending habits.
3. You dream of taking your family on nice vacations and buying nice cars, but you have no way of affording these things.
This is where being financially fit takes your life to the next level because it’ll let you live your life the way you want…financially.
And this is where money can buy happiness.
If you are fit in the first three parts of the Quadrafit Triangle (you’re physically healthy, mentally happy, and have a purpose), being financially fit means you can afford to do things you love.
Or hire someone to do things you hate…
• You can take your family on nice vacations
• You can hire people clean, cook, & mow the lawn
• You can travel in class, instead of on a budget
• You can buy healthier food & a better gym membership
• You can give to the organizations & charities you care about
• And you don’t have to worry about the price!
Your life is like a cake and money is the icing.
You can have a great cake (the bottom 3-layers of my Quadrafit Theory) but if the icing tastes like poo…suddenly, the cake doesn’t tase so good anymore…
Just like how you can’t use a bunch of delicious icing to fix a nasty cake. You can’t use money to fix a miserable life.
Money is the icing to your life.
You need to be fit in all 4-parts of the Quadrafit Triangle. this way you have a great cake with delicious icing on top.
And when it comes to becoming financially fit, there are three ‘keys’ you have to understand:
1. Living below your means (strategically)
2. Increasing your income (the smart way)
3. Using your money (investing to create passive income)
Tomorrow I’m going to email you with strategic ways to save your money.
Yes, there is a right way and an expensive way to save your money. And tomorrow, I’ll be going over the most efficient ways to save.
Wednesday I’ll be talking about how you can increase your income.
And Thursday I’m going to talk about investing to generate passive income.
It’s going to be a fun week – so be sure to look out for my email tomorrow.
P.S. I’m opening up a beta-test group for our 5-week money management course 1-week from today! The test group will be open for a limited time & then I will close the course down. Those of you that get in early will get a 40% discount. Stay tuned for more details
Please note that when I send these newsletters, I’m sharing my experience and opinions. I’m sharing the resources, tools and information that I think can make an impact in your life.
However, I can never be responsible for your success or guarantee anything. The problem is that most won’t take action, hence, most don’t get any results. That’s why results are not guaranteed. And everyone is different so I cannot guarantee that everyone will like or benefit from things that I find beneficial.
I care about your success and that is why I believe in being real and absolutely transparent with you