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Written by: David Wood, Vice President, Fixed and Fixed Indexed Annuity Sales at Lincoln Financial Group
I've been thinking about the 60/40 portfolio a lot lately. Chances are, you have too.
The 60/40 portfolio has been a classic investing approach since the 1950s. The basic idea was to diversify across assets that weren't correlated. It has long been a simple and effective solution.
In 2022 we saw the 60/40 strategy hit a pretty significant speed bump. With $36 trillion lost across key global bond and equity indexes, the traditional 60/40 portfolio experienced one of its worst years on record. What shocked investors — and called into question the dependability of this time-tested strategy — was the fact that stocks and bonds fell in unison.
It's the first time I've seen this sort of correlated collapse in my lifetime. While I am still very much a staunch advocate for the 60/40 portfolio, it has been interesting — and concerning — to observe the reaction. Clients don't want complexity. And they certainly don't want volatility. But they still need to stay focused on their income goals, and that can be difficult to accomplish if they are reacting emotionally to short term market turbulence.
The flight to cash: Simple, predictable and … "safe?"
One traditional response was very much expected: Just wait it out on the sidelines. Today there's more than $6 trillion sitting in "a wall of cash." For some it's a strategic investment decision, but I know many reps I work with are concerned. Cash may feel "safe" but clients holding too much cash for too long may not hit their income goals, due to the "cash drag" resulting from inflation and relative lack of growth compared to other investments.
The flight to alternatives — not simple, not predictable, and quite possibly not safe
There's also been a distinct spike of interest in the more esoteric investments that fall under the catch-all title of alternatives, because they function differently from stocks, bonds and cash. But it can be challenging to fully understand their complex reporting requirements, liquidity and taxation structures.
What has raised my eyebrow is the rising number of articles aimed at the general public encouraging investment in alts, such as this TIME article, which explains the low correlation between alternatives and more traditional asset classes. I've seen a lot of reps scrambling to better understand the complexities of all sorts of unique investments because their clients are bringing in articles or getting advice from a cousin that alts are the place to be. It may be right for some clients. But is this necessarily in the best interest of every client?
Fundamentally, many investors are just looking for protection
Clients nearing or in retirement do NOT want to derail the progress they've made over decades. Your clients have always been our "North Star" here at Lincoln. So some consumer sentiment results that the Alliance for Lifetime Income shared recently really got my attention. The research found:
- Nearly nine out of 10 consumers believe protection is important when thinking about retirement planning.
- Two-thirds would protect half or more of their retirement income from loss.
- When asked "How anxious are you that your savings may not provide enough for you to live on in retirement?" a significant eight in 10 of study respondents (80%) are somewhat, moderately or extremely anxious.
The last thing they need is a setback as they approach retirement. In the years I've been in the industry, I've seen how important protection is to clients. It keeps them focused on their long-term goals and helps immensely with their decision making, especially if they could use more diverse diversification, or they've been using cash as a safety blanket, and need more courage to invest for growth again.
Seeking out a clear, understandable and noncorrelated strategy — with 100% protection
So what can we offer investors who are seeking either the safety of cash, or exotic alts that are difficult to understand and may not align with their goals and risk tolerance levels? Sometimes the answer to increasing portfolio efficiency, especially while offering growth in all markets, can be very simple and straightforward.
Help investors find growth opportunities in all markets, and build confidence with 100% protection. Learn more here.
If your clients are concerned about the market, but they need to keep their retirement savings moving forward, then protected, structured assets and a dual directional strategy may be considered as a sound complement to the classic 60/40 portfolio. And additional protection and confidence can be a sound complement to a focused, long-term strategy.
To read other blog content like this, visit Lincoln's informed financial professional blog.
Related: Mastering Volatility: Your Strategic Approach Matters
Investing involves risk including the risk of loss of principal. Asset allocation and diversification cannot guarantee a profit nor protect again loss.
Any strategies discussed in this publication are strictly for illustrative and educational purposes and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. The information is not intended to provide investment advice. The information included in this publication has been developed using industry sources deemed reliable. Any opinions expressed in this publication reflect a judgment at this date and are subject to change.
Lincoln annuities are issued by The Lincoln National Life Insurance Company, Fort Wayne, IN, and distributed by Lincoln Financial Distributors, Inc., a broker-dealer. The Lincoln National Life Insurance Company does not solicit business in the state of New York, nor is it authorized to do so. Contractual obligations are subject to the claims-paying ability of The Lincoln National Life Insurance Company.