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Stocks and Bonds Are Both Down – Here’s What You Should Do

Traditionally, when saving for retirement, many people have been advised to divide their portfolio holdings up into a mixture of stocks and bonds.  A 60-40 combination is common, but that ratio varies depending on certain factors, like age. 

The idea was that when stocks were up, so were investors’ portfolios.  And when stocks were having a bad run, those losses were partially offset by their bond holdings. 

And this way of doing things usually worked – at least until this year, when it suddenly didn’t. 

According to the Wall Street Journal, through about mid-November of 2022, the S&P 500 was down about 15 percent, including reinvested dividends, while bonds entered their first bear market in decades. That so-called “protection” that bonds were supposed to provide was nowhere to be found. 

So what is the average person supposed to do? 

First of all, if you’re retired and you’re taking systematic withdrawals from a balanced portfolio, you could be asking for big trouble.  To create your desired “cash flow” you would probably need to sell assets.  In a year like this one, selling assets means selling when values are down, selling those equities to fund your near-term expenses is a recipe for disaster that could devastate your portfolio.   

A Bucket Strategy, one that’s designed to give you 12-15 years of cash flow to weather the bad markets, would in my opinion be a much better potential solution to surviving the inevitable market downturns.   

But what about bonds?   

If you’re going to use bonds, a fixed annuity product may actually be a better alternative to the volatile bond market.  Why?  Well, there are a few reasons I might consider this option. 

First, interest rates have come up dramatically over the past year or so, sending the value of Treasury bonds on a steep downward spiral. This can compound the losses you experience from the stock portion of your portfolio. 

Second, if the economy enters a recession, this could cause losses in high-yield bonds and maybe even some investment-grade bonds. Losses in both bonds and stocks runs counter to the reason why you set up the stock-bond portfolio in the first place! 

In this respect, certain fixed annuities may offer several advantages over bonds and bond funds, perhaps the biggest of which is that the insurance company guarantees the value of your principal. What this means is that even if interest rates go up, unlike the situation with bonds, your principal will not go down in value. 

And Fixed annuities typically do have any fees inside unless you cash in early. 

A couple of things to be aware of here: first, fixed annuities are back by the insurance company that issues them, not by the federal government. So be sure to use one of the big-name insurance companies. Second, annuities normally have something called a surrender period, which means that you need to hold that annuity until a certain period of time has passed – maybe three, four, five years or more – or you risk losing any interest that you’ve earned, and maybe even more than that. 

To wrap up, there are two takeaways from this video. The first one is that we believe a Bucket Strategy is better than a standard 60-40 stock-bond portfolio that uses systematic withdrawals to provide you with cash flow in retirement. Matching your assets to your liabilities can potentially provide more longevity to your nest egg without affecting your spending. 

The second one is that certain fixed annuity products, when used judiciously, may be great alternatives to bonds due to their ability to withstand interest rate changes. Adding fixed annuities to your Bucket 1 may give you a much better opportunity to maintain your cash flow in retirement. 

At Lucia Capital Group, we strategize every single day, as we strive to help families and individuals increase the probability of managing their goals in retirement. How can we help you the most? Just give us a call. 

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal.

Accordingly, no client or prospective client should assume that the information presented serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

It is important to keep in mind that investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. Interest may be subject to the alternative minimum tax. Treasury securities are backed by full faith and credit of the U. S. Government but are subject to inflation risk.

S&P 500 Index is an unmanaged index and includes a representative sample of large-cap U.S. companies in leading industries. An investment may not be made directly in an index.

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Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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