CONTRIBUTORS
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
In 2022, stocks and bonds were both down double-digits for the year. According to Callan Associates, there have been only two other years since 1926 when both stocks and bonds have been negative—1931 and 1969.1 Rising interest rates, record inflation, increased volatility, and double-digit negative returns for both stocks and bonds during 2022 left many advisors and investors wondering if they need to reconsider their retirement portfolios.
60% US Stock/40% US Bond Index Portfolio
1976–2022
Note: Stocks are represented by the MSCI USA Index, and bonds are represented by the Bloomberg US Aggregate Index. Total returns were considered. The MSCI USA Index is designed to measure the performance of the large and mid-cap segments of the US market. The Bloomberg US Aggregate Bond Index represents intermediate-term investment-grade bonds traded in the United States.
Sources: FactSet, MSCI, Bloomberg. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. See www.franklintempletondatasources.com for additional data provider information.
We should be careful to separate the potential benefits of diversification and the 60/40 portfolio as a proxy. Unfortunately, as we experienced in 2022, there are periods of time where traditional investments are highly correlated to one another.
The roles and use of alternative investments
Pension plans have historically made significant allocations to alternative investments because of the various roles that they can play: pursuing growth and income, portfolio diversification and inflation hedging. However, up until recently, many of these investments were limited to institutions and family offices. Now through product innovation, these investments are more accessible to a broader group of investors, with more flexible features.
Overall, in our view, retirement plans should be modernized to reflect the broader set of tools available to pursue client goals. We believe advisors and investors should rethink their retirement strategies to respond to the changing market environment, the new products at their disposal, and the fact that many retirees are living longer, more productive lives through their retirement years. Alternative investments can play multiple roles in retirement portfolios, which include generating potential growth and income, seeking to dampen volatility, and/or helping to hedge the impact of inflation.
We believe advisors and investors should develop different approaches for the accumulation and decumulation phases of retirement, and should periodically revisit retirement plans to ensure they are on target for their objectives. If used appropriately, alternative investments may improve the likelihood of achieving the various goals through retirement planning phases.
Endnote
- Source: Kloepfer, J. “Unprecedented Territory—and the Inherent Limits of Diversification,” Callan, May 13, 2022.
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.
Investments in alternative investment strategies are complex and speculative investments, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative investments may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. An investment strategy focused primarily on privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.