When it comes to retirement portfolios, a 60%-to-40% (60/40) mix of stocks and bonds has been a cornerstone for decades.
The results have been nothing short of spectacular. The compound annual growth rate has been 10.2% since 1980, according to the Financial Times:
But the outlook for the 60/40 portfolio is bleak.
There will be huge obstacles to matching historical returns and generating income.
And the reason why may shock you. The problem isn’t just that bonds offer historically low yields.
But there’s still a way to attain your retirement goals without betting the farm on speculative stocks…
Rethink the Building Blocks of Your Retirement Portfolio
It’s no secret that investors will face significant challenges generating sufficient levels of income … the Federal Reserve does not intend to move short-term rates from zero for at least the next three years.
And longer-dated bonds don’t offer much more income either, with the 10-year Treasury yield at just 0.66% … still near its lowest level ever.
Preparing for retirement and generating income from a portfolio of assets has never been tougher!
But there’s more.
We know that stocks and bonds are both expensive. But what is often lost on the average investor is what that means for the future.
Projections from GMO show that U.S. large-cap stocks are expected to decline 6.5% annually for the next seven years.
U.S. bonds are expected to fall 3.3% every year over the same time frame:
Those return projections are driven by mean reversion … a fall back to reasonable valuation levels.
And that’s why the expected return on a 60/40 portfolio looks dire for the next several years.
But there’s another pathway for you to reach financial freedom.
To overcome these challenges, Ted and I show Bauman Letter subscribers how to utilize lesser-known investments for the chance to grow your portfolio and generate income. You can watch a special presentation from Ted about one of our favorite income streams here.
Those investments include vehicles such as real estate investment trusts, American depositary receipts and closed-end funds…
And there’s another alternative investment we’ve used to generate stable income in a low interest rate environment.
How to Find Yield With Preferred Stocks
Ted and I have received great questions from readers about preferred stocks.
As I mentioned last week, preferred stocks are issued and pay an interest rate like a bond. But they can also be bought and sold on an exchange just like a stock.
Preferred stock is issued with a par value … quite often at $25 per share. From there prices can fluctuate in the market and can be influenced by variables like interest rates and credit quality of the issuer.
But when you’re evaluating individual securities, you need to pay attention to more than just the stated yield.
That’s because many preferred stocks are callable.
That gives the issuer of the preferred the right to redeem a preferred stock issue at a specified price beyond a certain date.
And that’s why it’s critical to calculate your yield to call as well.
That measure takes several factors into consideration, including:
- The current price of the preferred.
- The price that you will receive if called.
- Remaining interest payments you receive up to the call date.
As a hypothetical example, suppose that a preferred is trading at $26 and pays an annual dividend of $1.50 per share. And let’s say the issue is callable at its par value of $25 in four years. So you would lose $1 on the share price, but still collect $6 worth of dividends.
Your yield to call is still 4.9%, compared to the original coupon rate of 6%.
But if the yield to call is significantly lower than the stated yield, you may want to rethink your purchase.
That’s a lot to digest.
But that’s what Ted and I are up to behind the scenes … we discover and evaluate the best opportunities to grow your portfolio and generate the income you need.
Especially as the traditional approach to retirement and income faces its biggest challenge in generations.
Research Analyst, The Bauman Letter