My Thoughts on a Recent Article

By Michael Foster CFA, CFP®

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I like to think of myself as a positive and optimistic person. I have a general excitement for the future and believe that most people are good-natured. Don’t get me wrong, I have the occasional spicy (negative) music take, get a little too down when the Braves lose (the Phillies again?), and get impatient when plans are delayed without notice (#1 pet peeve). All that aside, my glass is half-full way more often than not.

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I was sent a Wall Street Journal article last week titled “Your ‘Set It and Forget It’ 401(k) Made You Rich. No More.”. As you might guess, this article isn’t beaming with sunshine, high-fives, and puppies. It discusses how an asset allocation of 60% stocks and 40% bonds, which is often used as a proxy for a standard investor portfolio, “isn’t going to work nearly as well as it has”. It gives numerous reasons to support this hypothesis and provides little hope to the reader. The header picture is of a rainbow in clear skies abruptly ending into one lonely cloud… not fun! 

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Articles like this can understandably cause concern among investors. If you can’t invest confidently in a similar way to the last several decades, what should you do? Are investments set for a doom and gloom future? Is there anything to be hopeful about in your portfolio? Will the Braves sign the pitching depth they desperately need this offseason? All important questions that need answers!

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The 60/40 Portfolio

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To begin, I think it’s important to decide what a true 60/40 portfolio can and should look like. The author chooses 60% to the S&P 500 index (largest 500 stocks in the US) and 40% to 10-year Treasury notes as a proxy. If you’ve read any one of our blog posts, you will recognize the phrase “broad diversification”. 

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In building a broadly diversified asset allocation targeting 60% to stocks, you wouldn’t just own the 500 largest US stocks. You would also own midsize, small, and even microcap US companies. You would also own stocks from developed international countries, emerging markets, real estate, and maybe even other forms of equity. On the bond side, you would own not just 10-year Treasuries, but other maturities of Treasuries, investment-grade corporate bonds, other government debt, international debt, asset-backed debt, and maybe more here as well. The US makes up a large portion of the market (about 59% of the global equity market and 40% of global debt market as of the end of 2022¹) but not all of it! 

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To the author’s credit, he mentions some of the diversifying options and rebalancing in the article. It just happens to be the second to last paragraph after you’ve read the rest of the piece telling you how bad things might be.

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Real Returns of US Stocks

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The article also goes on to show that US stocks are currently expensive when looking at a Shiller valuation metric. When US stocks have been in the most expensive 20% in the past, the article shows that they produce real returns (meaning inflation-adjusted returns) over the next decade of about 2.7% per year. Don’t get me wrong, this isn’t as attractive as when stocks have been cheaper, but 2.7% above inflation is still positive and an overall increase in purchasing power. 

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In aggregate, I still like to think of this as a good thing! Historically, when things look like they might be working their hardest against you, you’ve still received some return over inflation over the next decade. Is the alternative just holding cash and losing purchasing power to inflation every year? 

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A Look at Time Periods

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The article lists an incredible period from the end of 1981 to the end of 2020 where a $1,000 investment in a 60/40 portfolio grew to $18,728 after adjusting for inflation. That’s amazing! This time period included Black Monday, the dotcom bubble, the 9/11 attacks, the Global Financial Crisis, Brexit, and numerous other concerns for investors. Compounding and the growth of capital markets over time, even in the face of adversity, is truly astounding.

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This period of strong growth also includes the anecdote in the article of the last time that Treasury yields were this high 16 years ago. This rise in rates undoubtedly hurt bond performance last year, but if it’s something we were able to overcome 16 years ago as part of the same period listed of rapid growth used, why have all the pessimism now? 

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On the opposite side, the article uses the preceding time period of 1965-1981 to show how real returns can be negative over time. It uses the example of college savings of $1,000 that ended in just $785 in real terms by the time the newborn became a senior in high school. This is a stark return difference from the time period above. What else is different? Well, the length of the period is definitely different, and I’d argue that the purpose of the funds is different.

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In the first period, we are using a 39-year time period versus only a 17-year period in the second. What happens if we extend that 17-year period and an additional 22 years in either direction? Without having the same calculation tools used in the article, I’d bet that returns look a lot different! I don’t think it’s totally fair to compare a 39-year retirement savings horizon to a 17-year education savings time horizon.

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Regarding the negative real returns during this period, I’d again look to the asset allocation (see 60/40 paragraph above) and point out that negative time periods, even longer ones, can happen when investing. Nothing is guaranteed, but I place more weight on the resilience of capital markets than sitting on the sidelines over time. Investors should carefully consider their goals and objectives when choosing when and how to invest. 

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Look on the Bright Side

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I’d encourage anyone with a pessimistic long-term view to try on some rose-colored glasses for a minute. Despite the always-lurking negatives, markets have rewarded disciplined investors over time. Personally, I’m excited for the coming innovations and future growth. Look back at everything that’s happened in just the past few years. I can call a ride to drive me to one of Charlotte’s many breweries by pressing a button. I can get basically anything delivered to my house in 2 days. I can listen to most of the songs that have ever been recorded anytime I want to. I can video chat with friends and family on-demand from hundreds of miles away. I can watch an impressive library of movies and shows commercial-free from my couch. I can proofread a blog using free AI tools. I haven’t done this one yet, but probably should! 

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There’s always a reason not to do something. There will always be valid reasons that make the present seem like a bad time to invest. Whether it’s high valuations, global instability, inflation, debts and deficits, market highs, or a host of other reasons that catch the eyeballs of readers, investing can be and is often scary. This isn’t a new concept though. Markets react with new information very quickly and will go up and down over time. If I (or anyone else) knew exactly when these movements would happen, I’d act on them, and I’d be writing this on my private island right now. In the meantime, I’ll continue to stay positive and use the information I have to make the best decisions I can in the moment. 

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¹ Source: Dimensional Fund Advisors, World of Opportunity Maps below

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