INSIDE THIS EDITION:
Should We Rethink the Role of Core Bonds in a 60/40 Portfolio?
Year-End Tax Planning Checklist 2020
Is ESG Investing Another Bull-Market Craze or Here to Stay?
Coronavirus / COVID-19 Resource Center
A 60/40 portfolio is synonyms of a well-diversified portfolio that is composed of public traded stocks and bonds. As indicated by the name, the portfolio is typically composed of 60% stocks and 40% bonds. In the past two decades, the total return of a 60/40 portfolio has been spectacular. Some investors may attribute the past performance to stocks.
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As matter of fact, high-quality core bonds have delivered nearly 6% annualized return, just slightly shy of the S&P 500 index.
The core bond had two tailwinds on its back. First, they had a higher starting yield, which was translated to higher coupon incomes in the following years. Second, the decline in interest rate has caused the bond prices to appreciate. As a result, both incomes and prices have positively contributed to the bond’s high total return.
Moreover, core bonds have acted as the portfolio ballast that dampens volatility. In periods of stock market stress, core bonds can provide the most needed positive return when stocks faced drawdown. This is because interest rates tend to fall when investors are pessimistic, which coincides with poor stock performance.
In isolation, core bonds display higher volatility than cash. However, in a portfolio that includes stocks and other riskier holdings, core bonds have historically offered a reduction in volatility similar to that achieved by holding cash but offering higher returns.
Therefore, core bonds serve as an insurance policy that has a positive payout during market stress but a negative premium. In other words, investors get paid by owning an insurance policy because of the positive (and high historical) total return of bonds.
We believe that zero to low-interest-rate doesn’t eliminate the above-mentioned merits of bonds in portfolio construction. However, the Interest rate is likely to remain low for years to come, due to the high unemployment rate, muted inflation, large fiscal deficit, and the Fed’s new policy twist. The real interest is negative across the entire Treasury yield curve. That said, investors could lose purchase power if they hold Treasury bonds to maturity.
As a mirror to the past, the low starting yield suggested that the total return potential of core bonds is mediocre at best. If history can be any guide, the current yield of core bonds would indicate a 1-2% total return for the next decades, which barely outruns expected inflation. As income investors, retirees as individuals and pension funds as institutions are likely to find investment backdrop increasingly challenging.
On the other hand, low starting yield means that the buffer of core bonds to offset stock drawdown in market selloff has diminished because there is only limited room for the interest rate to go to zero from here. At the same time, bond duration, or interest rate sensitivity, has been extended. In a period with higher-than-expected inflation, investors may see that stocks and bonds both decrease in value. That said, the expected diversification benefit of bonds may disappoint and even work against the intention of portfolio insurance.
At the first glance, the market has largely bounced back from March lows and even rallied to new highs. Under the surface, portfolio construction has fundamentally changed. It is time to rethink the role of core bonds in portfolio construction.
What are the appropriate checklists for year-end tax planning?
Written by Scott A. Bishop, MBA, CPA/PFS, CFP® and Michael Churchill, CPA/MSPA, CFP®
From our experience, tax planners often develop checklists to guide taxpayers toward year-end strategies that might help reduce taxes. Throughout the year, we publish many timely tax-related articles (summarized here). In August this year, we also published our Top 10 Tax Planning Ideas for 2020. The tax filing season is now behind us. We have put together a year-end checklist of things that you should review. We have grouped the list into several different categories, such as “Filing Status” or “Employee Matters,” for ease of reading. As year-end approaches review each category that applies to your situation and consult with your tax advisor. Also, as this is an election year, we created a pice to compare the Trump vs. Biden Tax Policies.
Is ESG Investing Another Bull-Market Craze or Here to Stay?
Written by Kevin Lenox, CFA®, CFP®
The environmental, social and governance (ESG) investing craze has become an ethical gold rush on Wall Street, as investors are attracted by the allure of earning higher returns while investing in “good” companies that occupy the moral high ground. Asset growth into ESG strategies has surged in 2020, as virtue signaling has gone mainstream. It’s woke. It’s trendy. It’s likely the hype surpasses the reality of what ESG will deliver to future investors.
Over the last several weeks, the team at Avidian Wealth has attempted to keep our clients apprised of updates related to the markets, economy, government, tax, retirement, and other changes impacting us during this difficult time. As the Coronavirus (COVID-19) pandemic continues to spread, its impact on businesses and individuals has been significant. Stay up-to-date on the latest news with this Coronavirus Resource Center as your go-to resource for commentary, news, and other resources. Bookmark this article to check back regularly for updates.
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