No longer are the days when you can just put your investment portfolio in cruise control, invest 60% in stocks and 40% in bonds and assume your riches will carry you through retirement. The reality is investors are facing uncertain economic times as well as anemic returns on bonds. As a result, investment strategists say investors may need to increase their exposure to stocks if they want to boost returns in the new year.
Bond Market Blues
The yield on a 10-year treasury note hovers just above 2%. Keep in mind, the yield was above 5% ten years ago. To put that in perspective, 2% interest on a $100,000 investment totals $2000. At 5%, that number is looking more like $5,000 — so a sizable difference. Unfortunately for many investors, low bond yields may be the new normal. Strategists at J.P. Morgan Asset Management say they expect a deteriorating outlook for U.S. Treasury returns.
Investment advisors say when bond yields are so low and they make a up a large part of a portfolio, relying on the traditional 60/40 allocation model isn’t always the best choice.
“The problem with the 60/40 model is that on 40% of your money, you really can’t build any real wealth. You have to consider inflation and then you have to take into account the taxes you have to pay on the interest you earn on those bonds. It becomes harder to get ahead,” says Charles Farrell, chief executive of Northstar Investment Advisors in Denver.
Boost Exposure to Stocks
Farrell recommends investors of all ages review their allocation model and consider increasing exposure to stocks. He says younger investors can take on more risk and older investors may also want to boost their stock holdings as life expectancy increases.
Farrell’s 2016 Recommended Asset Allocation
Banking on Dividend-Paying Stocks
As an alternative to bonds, Farrell recommends high-quality dividend-paying stocks to generate income. “This is a nice way to get income that’s probably higher than what you’re getting in interest payments on bonds because a lot of companies are yielding higher than that,” he says.
Blue-chip companies including Coca-Cola (NYSE:KO), Caterpillar (NYSE:CAT) and Chevron (NYSE:CVX) each have a dividend yield well above 3% higher than the payout on a 10-year treasury note. Even though a company such as Chevron is being punished by low oil prices, strategists say if investors have time and patience, they can collect a dividend and gain income while waiting for business conditions to improve.
Blue-Chip Stocks Offer Higher Yield
Farrell warns not all dividend-paying stocks are equal. He recommends investors stay clear of stocks with very high yields since it could be a red flag to other issues. Instead, he says stick with high-quality companies that have been around for a long time and have demonstrated the ability to maintain and grow dividends over many market cycles.