Discussing the Performance of Common Investments and the 60/40 Split
May 24, 2022
Welcome to Wealth Enhancement & Preservation’s Market Minute, where we get to update you on everything that happened in the financial markets this week. My name is Darrin Cohen, and I am the CEO of Wealth E&P.
It’s been another rough week for the markets last week, with all three indices down fairly significantly. Our All-Weather score is down at 13 out of 40, meaning we are in a moderate-conservative position. We suggest that you take a look at your portfolios at the same time.
I want to take a look and share with you why we believe the traditional 60/40 portfolio is not going to work in current conditions. First, taking a look at the bond market above, you can see that we've been in a 40-year bull cycle for bonds. This means that interest rates have been on the decline and values have driven up. However, as you might expect, interest rates have ticked up recently and value is coming down. We would expect that to continue for the next 5 or 10 years or so.
At the same time, P/E ratios for the stock market are the greatest indicators of where stock market values are going to go in a forward-looking manner. With traditional P/E ratios in the 15 to 20 range, you can see above that in the last couple of years, it's spiked up at 40. It has actually come down to 20 right now, which isn't terrible. All that tells us is that the stock market is actually extremely uncertain and unpredictable, and it is almost schizophrenic (I've been using that word lately).
So, when you put those two together, you have an uncertain stock market and a bond market that's near-certain to lose money. We believe it's more important to have a tactical hands-on approach or a process to adjust by adding or decreasing risk to be in certain sectors. It is great to be in the right place at the right time rather than just buying and holding the markets right now.
If you have any other questions about this topic, if you want a risk profile, or if you would like a retirement projection, please feel free to reach out or visit www.wealthep.com. Otherwise, stay tuned for our Market Minute next week!
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