Flipping the Script on Asset Allocation?

With the current fixed income environment, have you given any thought to your portfolio asset allocation?

For most of the last 15 years bonds paid next to nothing, a big fat zero actual return. For a stretch in 2021 they actually paid less than nothing: 10-year TIPS traded at negative real yields, meaning you were paying the government for the privilege of protecting your own purchasing power. In that world, equities weren't one part of the growth engine. They were the only party in town.

That's now changed. Depending on how you view your portfolio, it could mean you can reduce your equity level without harming your planned return.

Let's say leading up to retirement, you or your advisor was reaching for a conservative 3% real return. To achieve that, with bonds contributing nothing towards the heavy lifting, your equity sleeve had to do all the work. Using standard long-term return assumptions, that solves out to an equity allocation around 66%, giving you roughly a 70:30 split.

With bonds now in positive territory, real yields pushing 1.5-2%, that changes the calculation considerably. You can flip the script to something closer to 30:70 and still expect that same targeted 3% real return. That's not a small tweak. It's a massive reduction in risk exposure.

Now before you go all "but, but, but," I'm the first to admit there are lots of variables. You need an accurate handle on your long-term spending horizon before you can lock in current bond rates. Maybe your real goal is maximizing inheritance, or maybe your current plan can handle any amount of volatility and you're happy with your allocation. Asset location and tax implications are another big one, and there are plenty more valid points besides.

But none of that negates the fact that, compared to a decade ago, your equity sleeve doesn't need to be as large to deliver the same planned return.

Obviously this doesn't mean you have to change anything. But to my mind, it's worth considering the possible implications for your own situation, even if that's just out of intellectual curiosity.

As for the calculations, I'm no Einstein and I'm not trying for a white paper. I fed the information into my local, friendly, house-trained AI and got it to crunch the numbers, then got another one to check its work. So if it's wrong, I take full responsibility. After all, the AIs in question were probably busy plotting our eventual downfall at the time and couldn't afford the compute cycles.

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