Gary G. from Tempe, AZ asks: Hi Mitch, I’m recently retired, and I’m thinking with bond yields on the rise that it may be a good time for me to shift away from stocks into fixed income. Curious to hear your thoughts on how to make this shift, and what areas of fixed income look the best to you. Thank you.
Mitch’s Response:
Thanks for writing. For the recently retired like yourself, I think it’s worth reflecting (positively) on the multi-decade investment run you’ve experienced. Starting in 1982, equity investors enjoyed multiple long and strong bull markets, which coincided with prime working years for the recently retired. Sure, there was Black Monday in 1987, the tech bubble crash, and the 2008 Global Financial Crisis. But for the patient and steady-handed, the bull markets that followed were always longer and stronger.1
One of the main complaints from retirees in recent years, however, has been the lack of risk-free yield in the market. Retirees often want the ability to generate income from portfolios without having to take on too much risk, and fixed-income markets in the aftermath of the 2008 Global Financial Crisis simply didn’t offer that. The yield on the 10-year U.S. Treasury bond, for instance, hovered around 2.5% or lower from 2012 until last year. When adjusted for inflation and in some cases taxes, retirees were earning next to nothing.
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That changed in 2022 and 2023.
The surge in interest rates has brought bond yields to a near 15-year high, and investors can once again enjoy 4% or 5% risk-free yields on Treasuries and other low-risk areas of fixed income. In terms of ‘shifting’ portfolios, as you mention in your question, investors have been doing just that. According to Morningstar, investors have withdrawn $98 billion from stock funds and added $170 billion to fixed-income funds in 2023, through October 31.
You asked about how to make the shift from stocks to bonds in a portfolio, and also about what areas of fixed income look the best. Unfortunately, I cannot answer that question specifically without knowing more about your financial situation and objectives. What I can tell you is that from a fixed-income perspective, Zacks Investment Management has been active in extending the duration of our bond portfolios to capture the higher yields now offered on the intermediate portion of the yield curve. For the very short-term maturities, we continue to like Treasuries over corporate bonds. And for an intermediate and long-term portion of the curve, we think corporates are more attractive but Treasuries look better than they have in a decade.
But another note I’d like to make here is my view that most investors likely still need a healthy allocation to equities – even retirees. In my experience, most retirees have goals of growing their portfolios over time, in addition to providing retirement income. In some cases, the assets are meant for the next generation, in which case stocks can make a lot more sense. It’s all about finding the right balance between long-term growth needs and short-to-medium-term income needs. In either scenario, stocks and fixed income likely play key roles.
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Disclosure
1 Wall Street Journal. December 9, 2023. https://www.wsj.com/personal-finance/retirement/income-investing-bonds-dividend-stocks-01a97372?mod=djemMoneyBeat_us
2 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.
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