What You Need to Know
- The catalyst was the pandemic, which drove low interest rates down further and cut the income investors received from bonds.
- But switching to a heavily stocks-centric strategy could leave retail investors vulnerable.
- For many, though, as the market heads into a less predicable, post-pandemic era, the best hedge may be to reconsider spending habits, or to pump more money into savings.
Peter and Lynette Griffith had two-thirds of their retirement savings in shares during the 2008 financial crisis. By the time they stopped contributing to their pension fund last year, it was 100%.
“There’s the 60/40 split, or for us personally, we used to have a 70/30 rule — 70% shares, 30% fixed-income — for a decent return,” said Peter, a retired banker in Brisbane. “Those days are long gone. You just can’t live on the income anymore from term deposits or bonds.”
The Griffiths are not alone. Mom-and-pop pension savers are ditching the formula that’s anchored retirement plans for more than half a century, joining the likes of JPMorgan Asset Management.
The catalyst was the pandemic, which drove already low interest rates to rock-bottom, slashing the income investors received from bonds. At the same time, jumps in cryptocurrencies and meme stocks have drawn funds from some investors afraid of missing out on big potential gains.
For savers in the U.S. and Australia — among the biggest DIY pension markets — one of the key drivers for change came with the pandemic: the breakdown of the underlying principle of the 60/40 formula that bonds should cushion losses when stocks fall.
Since the dot-com bubble burst in the early 2000s, there has been mostly a negative correlation between equities and bonds. But at the height of pandemic jitters last March, the two were sold off at the same time. For the past three months, they’ve registered the strongest positive correlation this century.
It’s a bitter pill for those who followed the “balanced” mutual fund mantra that was gospel in the investment industry.
Even though the 60/40 strategy has produced gains of 7% this year in the U.S., financial advisers say many pension-saver clients are abandoning the formula — particularly the 40% bond component.
U.S. Treasuries have lost about 3% this year, while benchmark 10-year bond yields have slid from a post-pandemic high of 1.77% to around 1.50%.
“The modern retiree can now expect to live a 30-year retirement and stocks have beaten bonds 98% of the time over this time frame,” said Sam Huszczo, founder of SGH Wealth Management in Lathrup Village, Michigan. “It is difficult to watch the stock market soar while 40% of your assets are simply inching along.”
Stocks are particularly popular in Australia, where nearly a quarter of the nation’s $2.4 trillion in pension assets are controlled by DIY savers. The Griffiths for instance point to favorable tax treatments on equity dividends along with capital gains as reasons for liking shares.
The value of cash, term deposits and debt securities have fallen 6% since June 2017 to around A$160 billion ($123 billion) in March, data from the Australian Taxation Office shows.
Investments in overseas and Australian equities have risen 15% to about A$216 billion in the same period.