2020 has been unprecedented in more ways than one. Amid a global pandemic and a highly charged political landscape, it’s almost impossible to anticipate what is around the corner.
To navigate this uncertainty, advisors are working to build a shield that can help protect client portfolios against unexpected risks. However, risk management is unfortunately no easy task in today’s investment landscape.
Just 20 years ago, a hefty bond allocation would have been a no-brainer for any investor looking to mitigate risk in their portfolio. But with the 10-year Treasury currently yielding less than 70 basis points, fixed income is no longer an attractive option for many investors who are seeking a consistent source of income that will help sustain their lifestyle.
This poses a unique challenge for advisors: finding a risk management solution that helps protect against downturns, but also allows for participation in the upside potential of equity markets.
In an ideal world, there would be one perfect risk management solution to meet every investor’s needs, but the truth is risk management cannot take a one-size-fits-all approach. To help understand the options available and how to determine the best solution for your clients, let’s dive into how risk management has evolved in recent decades and the benefits of each strategy for investors.
A common risk management strategy for investors has historically been the balanced portfolio — a 60% equities/40% fixed income asset allocation. In the 1980s and 1990s, this asset allocation worked quite well for investors, particularly near-retirees seeking low volatility and a steady source of income.
However, with bond yields at historic lows, many argue that a 40% allocation to bonds will no longer provide the income many investors need. The Federal Reserve’s unprecedented monetary policy and stimulus support in 2020 has effectively upended traditional notions of a balanced portfolio of 60% stocks and 40% bonds.