Bonds Bonds Bonds and How To Properly Use the Stock Market Show 23

Are you still using the outdated antiquated 60% equities / 40% bonds portfolio allocation?

That rule originated in the mid 1990s when bonds were paying 6% to 7%. That’s not the case anymore. 

With interest rates hovering near zero, the 60/40 rule is broken. Many bonds are not even keeping up with inflation, so using bonds may be problematic.

Couple this with the new reality that corporate bankruptcies are piling up due to Covid-19. From the Financial Post: “Bankruptcy filings are surging due to the economic fallout of COVID-19, and many lenders are coming to the realization that their claims are almost completely worthless. Instead of recouping, say, 40 cents for every dollar owed, as has been the norm for years, unsecured creditors now face the unenviable prospect of walking away with just pennies — if that.”

Corporate bonds have always carried default risk but it appears this is becoming more of a concern. 

The challenge all investors face is volatility! And many people are wondering when the next drop in the market could come. The stock market is a growth engine, but the stock market is NOT an income engine. 

Once retirement is on the horizon, we need to begin shifting our focus towards income and distribution. How will you effectively produce income once your work paychecks stop? 

You may already know why the stock market is not an income engine. The market is unpredictable. It’s common to hear commentators say the market just always goes up. While that may be true overall, if you were in the market from 2000 to 2010 you may have experienced a negative average return like many investors did. 

What happens when you need to take income off of your accounts when the market is down? You eat away at your principle investment very quickly. 

 We all need to remember that retirement is different. What I mean by that is retirement brings a new set of goals — a new set of objectives, if you will. How many of you can remember the name of the pediatrician you went to when you were kids?  

Why don’t you still see that pediatrician for medical care? Because you outgrew that physician’s area of expertise. 

Retirement is much the same way. And it makes perfect sense that the strategies we use to get to retirement may be different from the strategies we use to get through retirement.

I continue on this train of thought in the podcast this week. Click here to listen. 

David continues on this train of thought in the podcast this week. Listen in for more practical tips. 

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