Today we are talking about how to devise alternatives to bonds in your retirement plan, as the 60/40 portfolio is no longer ideal.
We’ve learned that bonds are at a higher degree of risk than we realized. As we’ve seen in 2022, they can decrease just like stocks.
Bonds have also had a historic, low-yield environment for years that has chased away investors. They have been punished by our government's policies. However, the same high interest rates that have created such a mess this year have also created an opportunity.
Conservative bonds that provide a lower yield need to be replaced with an alternative, or principal protection. Since most bonds still carry risk, we want to turn to the purveyors of principal protection that have been doing this for centuries: banks, insurance companies, and fixed annuity companies.
They all have long track records of protecting people's money. You may have noticed they don’t offer much interest; they offer a guaranteed interest rate in long-term accounts that is pretty low. This low interest rate may not seem sufficient to justify a no-risk portfolio. But you can take that interest and use it to earn a higher, more moderate rate, while still maintaining safety.
How do you do that?
You exchange that interest. Give it back to the bank, insurance company or annuity company, and let them risk it. We’ve previously discussed whether it’s possible to have a low or no-risk portfolio that still has good growth opportunity. Yes, it's not too good to be true, and it’s been done for years.
The key is looking at it from an institutional risk management point of view. Large institutions, private foundations, and pensions aren't looking for volatility any more than you are, and these types of tools have grown as a result. The key is to make sure this type of tool is an elevator that only goes up, never down. Incorporate that into your portfolio as a bond alternative, and you'll take the volatility down to a level you’re comfortable with.
We also need an income alternative to stock and bond dividend portfolios, which are still risky and unpredictable. Your dividend portfolio may be doing alright, but it’s still at risk. Stock dividends can be a nice supplement during good times. But you don't want to make them the core of your income strategy because they can go up in smoke, as history has shown.
The gold standard alternative is an annuity. It’s not necessary to put all of your money into one. But it can provide safety, protection of principal, moderate growth, and guaranteed income. This is the same strategy that backs your pension and America's favorite annuity: Social Security. Only in an annuity can you guarantee income for the rest of your life and still have the opportunity to grow. They don’t need to be high-cost products and tools. If you choose a fixed annuity, you can have low or no fees, compared to some of the large fees that come with other tools.
No other system, investment, or strategy can provide this level of safety and reliability of income. It's tragic that misinformed advisors often steer clients away from the benefits that only an annuity like this can provide when incorporated into an overall strategy. It's important to be “agnostic” to strategy and product when making recommendations.
If you fail to plan, you plan to fail.
At Lord and Richards, we help clients build well-rounded portfolios in the context of a comprehensive plan. We are independent advisors who will keep your goals and needs front and center throughout the process and help you achieve financial independence from a biblical point of view.