Kora P. from Minneapolis, MN asks: Hi Mitch, I just read an article arguing that the “set-and-forget” long-term strategy for 401(k)s is done. The article claims that higher bond yields, inflation, expensive stocks, and an uncertain economic future mean a stock-bond blend for a long stretch of time is no longer reliable. I’m 35 and was hoping to save money and not have to worry about it. Is this now wrong?
Mitch’s Response:
Thanks for writing; you’re asking an important question. Let me run through the arguments in the article you’re referencing first, so I can adequately frame the issue and make some counterpoints.1
There’s an idea currently being floated in financial media that the 60/40 portfolio is ‘dead.’ U.S. Treasury bond yields have hit their highest levels in over 15 years, which has meant faltering returns for over two years. Meanwhile, the article leans into weak stock market returns in 2022, combined with higher Shiller P/E ratios, making stocks unattractive because of elevated valuations. The argument assumes that inflation is likely to remain stubbornly high – much like it did in the late 1970s and early 1980s – which will mean the Fed will have no choice but to keep pushing rates even higher.
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In 1981, the Fed was forced to push the overnight interest rate to 19%. With the 10-year U.S. Treasury bond yield currently at 5%, the idea is that rates may need to go even higher to quash inflation.
So, to reiterate the setup here: stocks are expensive and U.S. Treasury bond yields will likely need to move higher and stay higher, which means investors should not expect attractive returns out of either looking forward. The thesis of the article is that investors need to play defense.
But in my view, the argument is lacking on multiple fronts. First, when it comes to valuations, stocks are trading right around their 25-year average in terms of forward P/E ratios, and we expect earnings to accelerate in the coming quarters. The article also does not give any consideration to the possibility that breakthrough innovations (AI?) and/or new technology could result in significant opportunities for new growth and profit generation. Given you’re 35 years old, I would strongly recommend you do not bet against the U.S. economy now.
As for bonds, Zacks Investment Management generally agrees that longer-term U.S. Treasury bonds pose some interest rate risk to portfolios, which is generally why we tend to hold bonds to maturity and currently prefer to invest on the shorter end of the duration curve. But in your case, assuming you plan to work for the next 30 years and have a long investment time horizon, I do not see a major need to hold high levels of fixed income in your portfolio – if you hold any at all. Over a long stretch of time, a fixed income allocation can help reduce year-to-year return volatility, but we believe the equity portion of the portfolio is where you want to generate growth. If long-term growth is your focus, investing in equities should arguably be your focus now, too.
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Disclosure
1 Wall Street Journal. October 25, 2023. https://www.wsj.com/finance/investing/your-set-it-and-forget-it-401-k-made-you-rich-no-more-c06552c?mod=hp_lead_pos2
2 ZIM may amend or rescind the “8 Steps Towards a Stress-Free Retirement” guide for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the “8 Steps Towards a Stress-Free Retirement” guide for any reason and at ZIM’s discretion.
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