Beware of this common portfolio strategy. [Read this article on our website.]( [Smart Money Monday]  Oct 24, 2022 Are You Falling Victim to This Simple Investing "Rule"? Investors love easy-to-follow ârules.â The simpler, the better. In the â70s, they latched onto the Nifty Fifty. These were 50 stocks you could seemingly buy at any price and be guaranteed a solid return. They were described as âone-decisionââbuy them and watch them climb. Of course, it didnât work out that way. In the late â90s, anything with âdot-comâ was all the rage, price and valuation be damned. Just buy the story and itâll work out⦠or so the rule went. Over the last 100 years, however, one rule has reigned supreme: the 60/40 portfolio. As you probably know, the 60/40 portfolio is comprised of 60% stocks and 40% bonds. Itâs the most common, simplest investing rule on the planet. And for most of the past century, itâs been a smart and safe âhedge.â But in 2022? The 60/40 stock and bond portfolio is having its worst year in a century... Down 21.5%+ year to date. Today, Iâll explain why I donât personally use the 60/40 approach. Plus, a much better option for those looking for a fixed income alternative. Bear Market Rally, Or Bull Market Kick-Off? 23-year market veteran Jared Dillian says, âthe market is turning around with a vengeance.â Thousands will miss out on this once-in-a-20-year opportunity. Do not be one of them. [Click here for full details.](  The Problem with the 60/40 Theory The theory goes that in a bull market, the stock portion of your portfolio appreciates, while your bond portion remains flat but pays out cash interest. In bear markets, like weâre experiencing now, your stock portion falls⦠but your bond portion rises. So, historically speaking, your all-in results wouldnât be dire. The stock market may be down 20%, but a 60/40 portfolio might be down only a few percentage points. Hereâs the logic: - Stocks in the red = recession; - Recession = rate cuts from the Fed; - Lower rates = higher prices for bonds. For the most part, the 60/40 rule has worked for investors⦠that is, until now. And instead of blindly following the rule like most folks, you should ask yourself this critical question: What About Interest Rates? During COVID mania in the summer of 2020, the 10-year US Treasury sank as low as 0.5%. All other bonds are priced in relation to this key benchmark. So, with Treasuries at 0.5%, other corporate bonds had extremely low yields as well. That means sky-high prices. And after the massive amount of stimulus pumped into the economy, inflation predictably rose. Inflation today is still sky-high. But the Fed is responding as they should: by raising interest rates. Now, back to our formula for bonds: - Rates down, bonds up; - Rates up, bonds down. With interest rates skyrocketing, the â40â in the 60/40 rule has gotten smoked. And on the â60â side, inflation, geopolitical issues, and fears of a recession have sent stocks tumbling as well. You can see stocks (blue line) are down 22% this year while bonds (orange line) have fallen 15%: Nobody Has Been Spared The point is: Beware of simple rules of thumb in investing. Investing is never that simple. Does it make sense to buy bonds with interest rates hovering around 0%? Or to hold on to a bond and generate a meager 1% return? Of course not. But thatâs what 60/40 practitioners did, and theyâve been punished for it. Equities are down big this year. So are bonds. Even tech giant Apple Inc. (AAPL) hasnât been spared. Apple stock investors are down 20% this year. But Apple bond investorsâspecifically those who own the 3.6% 2042 bondsâare down over 25% year to date: The Only Fixed-Income Instruments Iâd Buy With bonds so blown out, the 60/40 portfolio may work from here. However, thatâs not a chance Iâm willing to takeânot with the way itâs trending. For a better allocation to fixed income, I like simple, plain-vanilla US Treasuries. The key is to stick to a short duration. Going out further on the maturity date creates more risk for little, if any, benefit. Right now, you can buy 1-year Treasuries that yield 4%. If you hold to maturity, youâll generate a 4% returnâwhich is great in todayâs market. You can also look at two exchange-traded fund (ETF) options on the short end of the curve: the iShares Short Treasury Bond ETF (SHV) and the iShares 1â3 Year Treasury Bond ETF (SHY). SHV is yielding 3.15%, while SHY is yielding 4.24%. Itâs important to note that SHV is less sensitive to interest rate risk than SHY. Thanks for reading, [Thompson Clark] âThompson Clark
Editor, Smart Money Monday Suggested Reading... [Be Greedy When Others
Are Fearful](
Â
[Pension Sandpile]( [Thompson Clark]Thompson Clark is a small-cap expert and value-focused investor with nearly a decade of experience in financial publishing. Thompson graduated from the Goizueta Business School at Emory University in 2010 with a focus in finance and accounting. He lives in North Carolina. He is the editor of Mauldin Economicsâ free research service, [Smart Money Monday]( . Don't let friends miss this timely insightâ
share it with your network now. [Facebook]( [Twitter]( [Email]( Share Your Thoughts on This Article
[Post a Comment]( [Read important disclosures here.](
YOUR USE OF THESE MATERIALS IS SUBJECT TO THE TERMS OF THESE DISCLOSURES. Â This email was sent as part of your subscription to Smart Money Monday . [To update your email preferences click here.]( Mauldin Economics | [1417 Sadler Road, PMB 415 | Fernandina Beach, FL 32034](#)
Copyright © 2022 Mauldin Economics. All Rights Reserved.