The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’
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The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

A savings mix of stocks and bonds has helped offset losses in previous years—but not this one

Mon, Nov 14, 2022 8:46amGrey Clock 7 min

For decades, Americans planning for retirement have been advised to invest in a mixture of stocks and bonds.

The idea was simple. When stocks did well, their portfolios did, too. And when stocks had a bad year, bonds usually did better, which helped offset those losses.

It was one of the most basic, dependable ways of investing, used by millions of Americans. This year it stopped working.

Despite a powerful rally last week after cooler-than-expected inflation data, the S&P 500 is down in 2022 about 15%, including dividends, while bonds are in their first bear market in decades. A portfolio with 60% of its money invested in U.S. stocks and 40% invested in the 10-year U.S. Treasury note has lost 15% this year. That puts the 60-40 investment mix on track for its worst year since 1937, according to an analysis by investment research and asset management firm Leuthold Group.

Many Americans are seeing decades’ worth of savings shrink, week by week. Belt-tightening among millions of households could serve as yet another drag on an economy already suffering from high inflation, a slowing housing market and rapidly rising interest rates.

Eileen Pollock, a 70-year-old retiree living in Baltimore, has seen the value of her portfolio, with a roughly 60-40 mix, dip by hundreds of thousands of dollars. The former legal secretary had amassed more than a million dollars in her retirement accounts. To build her savings, she left New York to live in a less expensive city and skipped vacations for many years.

“A million dollars seems like a great deal of money, but I realised it’s not,” she said. “I saw my money was piece by large piece disappearing.”

Bonds have helped offset the pain of the previous market crises, including the bursting of the dot-com bubble in 2000, the global financial crisis of 2008, and, most recently, the brief but punishing bear market brought about by the Covid-19 pandemic in 2020.

This year, U.S. Treasurys are having what could wind up being their worst year going back to 1801, according to Leuthold, as central banks have swiftly raised interest rates in a bid to quell inflation. The iShares Core U.S. Aggregate Bond exchange-traded fund, which tracks investment-grade bonds, has lost 14% on a total return basis.

The declines weigh especially on baby boomers, who have hit retirement age in worse financial shape than the generation before them and have fewer earning years ahead to recover investment losses.

“What’s shocking investors is there’s no place to hide,” said Peter Mallouk, president and chief executive of wealth-management company Creative Planning in Overland Park, Kan. “Everything on the statement is blood red.”

In 2008—the year the housing market crashed, Lehman Brothers declared bankruptcy and Congress agreed to an unprecedented bailout plan to rescue the financial system—bond prices soared. Investors with 60% of their money in stocks and 40% in bonds would have outperformed investors with all of their money in stocks by 23 percentage points, according to Leuthold.

Investors with a mix of stocks and bonds also came out significantly ahead of those putting all their money in stocks in 1917, the year the U.S. entered World War I; in 1930, during the Great Depression; and in 1974, after a staggering market selloff brought on by a series of crises including surging oil prices, double-digit inflation and Richard Nixon’s resignation over the Watergate scandal.

That final year, the S&P 500 declined 26%, including dividends. But 10-year Treasurys returned 4.1%. That meant a portfolio with 60% of its money in stocks and the remainder in bonds would have ended the year down 14%—a big hit, but still much better than the 26% loss it would have suffered had it been all in stocks.

Investors in a U.S. government bond are virtually certain to be paid their principal back when the bond matures. But before then, the bond’s value can fluctuate wildly—especially in the case of a bond that has many years before maturity. An investor holding a hypothetical older bond with a $100 face value and 1% coupon, or annual interest rate, that matures in seven years would get far less than $100 if she sold that bond today. That’s because the newest seven-year Treasury was recently issued with a coupon of 4%. To compensate for her bond coming with a much smaller coupon, the investor would have to sell at a lower price.

PIKESVILLE, MD – JUNE 29, 2022: Eileen Pollock, 70, poses for a portrait in her Pikesville home on June 29, 2022. She started cutting back spending at the beginning of the year by picking other items in the grocery store and making less library trips. CREDIT: Rosem Morton for The Wall Street Journal. PRICEPUSHBACK-MD

Miss Pollock said she wishes she didn’t have so much money tied up in the markets, but is in too deep to pull out of her investments. She has resigned herself to wait things out—hoping that the market will eventually go back up.

“If I get out of it, I’ll only lock my losses in,” she said. “I’ll just have to hang on to my belief in the American economy.”

Delaine Faris, 60, retired from her job as a project manager in 2019. She had hoped her husband, a technology consultant, could join her in a few years, based on how much their savings mix of 70% stocks and 30% bonds had grown over the previous decade. The couple took a big trip to Europe, then Argentina. They sold their house in Atlanta and moved to an exurb where they planned to settle down.

“I saved and invested responsibly and made plans,” Ms. Faris said.

Earlier this year, she strongly considered returning to work to supplement their savings. Layoffs in the technology industry have added to the couple’s worries.

She considers herself and her husband fortunate that they still have a home, his job, their health and their savings, but the past year has been a “big gut check,” she said. “Millions of us said, ‘We’re going to retire early, yay,’ and now we’re thinking, ‘Wait a second, what the heck happened?’ ”

Roughly 51% of retirees are living on less than half of their preretirement annual income, according to Goldman Sachs Asset Management, which this summer conducted a survey of retired Americans between the ages of 50 and 75. Nearly half of respondents retired early because of reasons outside their control, including poor health, losing their jobs and needing to take care of family members. Only 7% of survey respondents said they left the workforce because they had managed to save up enough money for retirement.

Most Americans said they would prefer to rely on guaranteed sources of income, like Social Security, to fund their retirement—not returns from volatile markets. But only 55% of retirees are able to do so, the firm found.

Susan Hodges, 66, and her wife decided to pull all their money out of the markets in May. “We can only take so much anxiety,” she said.

The couple, based in Rio Rancho, N.M., have since put some money back into stocks, but remained cautious, keeping roughly 10% of their overall retirement funds in the market. The couple has also become extra judicious about where and how they spend their money, cutting back on dining out and discussing online purchases with each other before pulling the trigger.

Market returns have grown increasingly important for U.S. households trying to prepare for retirement. In 1983, 88% of workers with an employer-provided retirement plan had coverage that included a defined-benefit pension, which provides payments for life, according to a report from the Center for Retirement Research at Boston College using data from the Federal Reserve.

In the following decades, traditional pensions were replaced by 401(k)-style retirement plans. By 2019, 73% of workers with an employer plan had only defined-contribution coverage, in which the amount of money available in retirement depends on how much workers and employers put into the plan and how that money is invested.

An October survey from the American Association of Individual Investors found that respondents had about 62% of their portfolios in stocks, 14% in bonds and 25% in cash. That stock allocation matched the average in data going back to 1987, while investors were keeping a bit less in bonds and more in cash than the long-term norm.

Defined-contribution retirement plans have leaned into stocks. In the 401(k)s of workers still employed by their retirement plans’ sponsor, 68% of participants’ assets were invested in equity securities, including the stock portions of funds, at the end of 2019, while 29% of assets were in fixed-income securities, according to a report earlier this year from the Employee Benefit Research Institute and the Investment Company Institute.

No one knows when the typical stock-and-bond portfolio will start working again, but the economic outlook is darkening. Economists surveyed by The Wall Street Journal expect the U.S. to enter a recession within the next 12 months as slowing growth forces employers to pull back on hiring.

Unlike during the dot-com crash, the financial crisis and the early days of the pandemic, the Fed appears unlikely to swoop to the markets’ rescue by loosening monetary conditions. Fed Chairman Jerome Powell has emphasised the need to keep raising interest rates to bring down inflation, even if it results in some economic pain.

Many financial advisers caution against abandoning the stock-and-bond approach after just one year of unusually bad returns. They point to charts tracking the S&P 500’s upward climb over the decades and note that throughout history, investors who bought at the end of the worst selloffs have been richly rewarded. Someone who entered the U.S. stock market during the depths of the financial crisis in 2009 would have received a return of roughly 361% over the following 11 years—enjoying stocks’ longest-ever stretch of gains.

For now, some advisers are reminding clients of the importance of staying diversified, such as by holding commodities like oil and precious metals along with stocks and bonds, or of holding enough cash to cover coming bills.

Eric Walters, a financial adviser based in Greenwood Village, Colo., said his clients have seemed notably sober as of late.

“Often we will start meetings and they will nervously ask, ‘Are we OK?’ ” he said. “I think they’re referring to the country and the economy and the stock market, and they’re also referring to themselves personally: Are we OK financially?”

Johnathan Bowden, a 64-year-old in Conroe, Texas, is no stranger to investing. He has read financial news for decades, tunes into webinars hosted by Morgan Stanley’s E*Trade platform and trades options on the side.

After retiring in June 2021, he began worrying the stock market’s supercharged run wouldn’t last. His fears were confirmed this year.

Rather than allowing himself to obsess over how badly the markets were doing, Mr. Bowden returned to his former job as a procurement manager. He works part-time—just enough to give himself a financial cushion, and to occupy himself during the week.

“I spent 40 years making this money,” Mr. Bowden said. “I don’t want to blow it.”


Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts

Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’

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Why Prices of the World’s Most Expensive Handbags Keep Rising

Designers are charging more for their most recognisable bags to maintain the appearance of exclusivity as the industry balloons

Tue, Mar 5, 2024 3 min

The price of a basic Hermès Birkin handbag has jumped $1,000. This first-world problem for fashionistas is a sign that luxury brands are playing harder to get with their most sought-after products.

Hermès recently raised the cost of a basic Birkin 25-centimeter handbag in its U.S. stores by 10% to $11,400 before sales tax, according to data from luxury handbag forum PurseBop. Rarer Birkins made with exotic skins such as crocodile have jumped more than 20%. The Paris brand says it only increases prices to offset higher manufacturing costs, but this year’s increase is its largest in at least a decade.

The brand may feel under pressure to defend its reputation as the maker of the world’s most expensive handbags. The “Birkin premium”—the price difference between the Hermès bag and its closest competitor , the Chanel Classic Flap in medium—shrank from 70% in 2019 to 2% last year, according to PurseBop founder Monika Arora. Privately owned Chanel has jacked up the price of its most popular handbag by 75% since before the pandemic.

Eye-watering price increases on luxury brands’ benchmark products are a wider trend. Prada ’s Galleria bag will set shoppers back a cool $4,600—85% more than in 2019, according to the Wayback Machine internet archive. Christian Dior ’s Lady Dior bag and the Louis Vuitton Neverfull are both 45% more expensive, PurseBop data show.

With the U.S. consumer-price index up a fifth since 2019, luxury brands do need to offset higher wage and materials costs. But the inflation-beating increases are also a way to manage the challenge presented by their own success: how to maintain an aura of exclusivity at the same time as strong sales.

Luxury brands have grown enormously in recent years, helped by the Covid-19 lockdowns, when consumers had fewer outlets for spending. LVMH ’s fashion and leather goods division alone has almost doubled in size since 2019, with €42.2 billion in sales last year, equivalent to $45.8 billion at current exchange rates. Gucci, Chanel and Hermès all make more than $10 billion in sales a year. One way to avoid overexposure is to sell fewer items at much higher prices.

Many aspirational shoppers can no longer afford the handbags, but luxury brands can’t risk alienating them altogether. This may explain why labels such as Hermès and Prada have launched makeup lines and Gucci’s owner Kering is pushing deeper into eyewear. These cheaper categories can be a kind of consolation prize. They can also be sold in the tens of millions without saturating the market.

“Cosmetics are invisible—unless you catch someone applying lipstick and see the logo, you can’t tell the brand,” says Luca Solca, luxury analyst at Bernstein.

Most of the luxury industry’s growth in 2024 will come from price increases. Sales are expected to rise by 7% this year, according to Bernstein estimates, even as brands only sell 1% to 2% more stuff.

Limiting volume growth this way only works if a brand is so popular that shoppers won’t balk at climbing prices and defect to another label. Some companies may have pushed prices beyond what consumers think they are worth. Sales of Prada’s handbags rose a meagre 1% in its last quarter and the group’s cheaper sister label Miu Miu is growing faster.

Ramping up prices can invite unflattering comparisons. At more than $2,000, Burberry ’s small Lola bag is around 40% more expensive today than it was a few years ago. Luxury shoppers may decide that tried and tested styles such as Louis Vuitton’s Neverfull bag, which is now a little cheaper than the Burberry bag, are a better buy—especially as Louis Vuitton bags hold their value better in the resale market.

Aggressive price increases can also drive shoppers to secondhand websites. If a barely used Prada Galleria bag in excellent condition can be picked up for $1,500 on luxury resale website The Real Real, it is less appealing to pay three times that amount for the bag brand new.

The strategy won’t help everyone, but for the best luxury brands, stretching the price spectrum can keep the risks of growth in check.


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