So why do these target things always suggest some mix of bonds and stonks, based on your age, if bonds can go down as well? Is the idea that they’re not as volatile?
More to the point - let’s say someone is ready to move half of their portfolio into low risk, but not zero risk and is scared to death of inflation - what should that person buy? Also this might be in an IRA so it might have to be stuff you can buy with an IRA.
TIPS are a good option.
The asset allocation rules of thumb were mostly all conceived long before ultra low interest rates. When long term interest rates are in a more typical historical range, then interest rates can go up or down and bond prices are volatile, sure, but the risk is more symmetrical than it is when you hold bonds in an ultra low interest rate environment. When interest rates are super low, like they have been for much of the last decade, there is more “room” for rates to rise than for rate to fall, in theory.
Having said that, for retirement planning specifically part of the issue is that annuities fell out of favor when interest rates became very low because annuities became expensive. When you buy an annuity from an insurer, they invest your premium mostly in fixed income like bonds. When interest rates rise bonds become cheap and annuities similarly become cheap. So in the old days if you held a bunch of bonds close to retirement and interest rates went up, your market value of bonds would drop but you could purchase a cheaper good annuity anyway because the annuity cost had dropped as well. Annuities have become a 4 letter word in retirement planning so most people probably are never going to look at it this way again. But hey if you hold a ton of bonds near retirement and they get wiped out by rising interest rates, maybe consider trading some of your discounted bonds for discounted annuities. I don’t love annuities for a bunch of reasons but there is no doubt that guaranteed income for life has some benefits.
Finally, if someone is scared of inflation there really isn’t anywhere to hide with asset allocation. Most asset classes do poorly in a low economic growth / high inflation economic regime. Most modern asset allocation techniques will include some allocation to not just stocks/bonds, but also to so called alternatives like real estate or commodities or infrastructure. The alternatives have some desirable diversification benefits, including the benefit of maybe doing better in certain inflationary situations. But they aren’t magic. If the stock market is down 20% these investments don’t return +60% to offset the stock market losses, they just round out the risk/return profile. But even in years like 2022 the diversification benefits are evident. Sure, the “safe” Vanguard BND ETF is down 12%. But stocks are down 20%. So even in a rising interest rate environment that is particularly punitive to bonds, they still helped “protect” you compared to 100% stocks.
I find it pretty annoying every asshole on twitter and every person in any way working in finance is absolutely certain they know what to do better than the actual Fed. I don’t get why it’s so hard for people to say “this stuff is hard, hindsight is 20/20, I think X but let’s be honest nobody knows for sure.”
Annuities seem like a good idea that the finance industry corrupted.
Like, a single premium annuity solves an important problem! But these assholes couldn’t help themselves and started pushing complex products that are absolute ripoffs.
Some - yes. Others are decent if you understand the product and know the strings attached. The problem is after 5 mins on Google you’ll probably know more about it than the “advisor” who is just after the commission, and will promise you that it’ll earn 8% with no downside risk.
Basic annuities are a funny product in the sense they are simultaneously very much fantastic (Guaranteed income for life!) and very much awful (zero flexibility, you hand over a single lump sum to an insurance company that you spent a lifetime building up and if you die the next day it’s all gone forever).
Just as bad is that one of the main reasons nobody buys annuities is that financial planners / investment advisors don’t want you to transact with an insurance company once and be set for life. They want you to put your $X in an account with them so they can bleed fees from that account for decades in retirement.
Futures pointing to giving back all the jpowell gains of yesterday, oof
Haha, that’s what I thought but this topic started because my TIPS fund is doing terrible this year despite the high inflation.
Huge miss by housing starts. Once home values and unemployment get worse this is going to get really rough.
In theory the stocks are the hedge against inflation, because corporate profits will go up proportionally, just not now.
Maybe a mix of bonds and commodities would be a better option in this specific environment, but that is not likely to repeat in our lifetimes. Instead of owning commodities directly (e.g. Kurggerands) you could own value stocks whose business will do well when commodities become more valuable (e.g. gold miners or oil companies).
Well most of those assholes know what the fed might have done that was better for them personally in the very short term. So they can sound smart saying that.
The analysis of what asset classes do well in inflationary environments usually acknowledges that not all inflationary environments are the same. The research I have seen considers different inflationary “regimes” where you have to look at the combination of inflation and economic growth:
High inflation / high economic growth - sometimes inflation happens because the economy is “over heated”. In HI/HEG scenarios a lot of asset classes actually do fine because corporate profits are still high, spending is high, employment is high, prices are high, everything is going up. Equities and commodities and real estate all do fine because people can pay their rents and there is high demand for services and products.
High inflation / low economic growth - sometimes inflation comes with severe economic growth contraction and then everything does pretty bad. If unemployment is high and people start defaulting on loans and companies need to start laying people off because of rising interest rates / high borrowing costs it gets pretty ugly.
The current environment is hard to get a read on because the impact of the pandemic on the economy is such a huge shock that things may not pan out in any particular pattern. But the first quarter of this year was pretty weak on economic growth and high on inflation, so the downward impact on asset prices across the board is not surprising. 2022 may turn out to be a High Inflation / Low Growth period which is basically a Death To Assets regime. But any surge in economic growth in the second half of this year would likely result in a big swing the other way. This the trap that the Fed is in - rising interest rates fights inflation but also tends to slow economic growth. It’s kind of like having a blanket that is too short. If you pull it up to your chin then your feet are cold.
I was a little surprised the performance different wasn’t more between these two. Even if you assume 8% inflation only lasts a year, that’s still a 5-6% bonus. There may be some reason that the nominal fund isn’t really apples-to-apples outside of the inflation adjustment.
I-Bonds have sucked until this year. Returns were under 2%.
You can see historic rates here:
I bonds interest rates — TreasuryDirect (rate is semi-annual, so double to get APR).
TIPS will guarantee you a certain real return over a certain time period.
Apparently the news media cant even decide what mortgage rates are now.
I don’t think there’s a single mortgage rate “index” that the media can quote.
