With stocks on a tear as of 12/3/2020, many globally diversified and balanced investors are wondering why they should maintain any allocation to fixed income. Interest rates are at historic lows and it wouldn’t appear there is a whole lot of reason to invest in fixed income. As stocks continue to inch upwards despite many economic concerns globally, it can be difficult for a participant to continue to invest in a model portfolio or target date fund that is using a large allocation in fixed income.
It is at times like this that we have to remember past performance is not indicative of future results. Interest rates have been low for a long time but at some point that may change. If we look at the late 90’s, it seemed that all you had to do was buy Pets.com, AOL, and JDS Uniphase and sit back & enjoy. As we all know now however, all stock market cycles are unique and sometimes companies actually have to make money to justify their prices.
Shortly after this .COM bust, we experienced the lost decade in US markets. While the period from 2000 to 2009 was a difficult decade for US equity investors, it was a pretty decent period for those with globally diversified portfolios. It wasn’t as exciting as the late 90’s, but for a retirement investor chasing what has just happened (think large cap US Growth), it provided a smoother path to solid returns.
That brings us to where we are today. Fixed income can continue to play an important role in a diversified portfolio. If you are close to retirement, you very well may need to generate income from your portfolio shortly and by using fixed income you can smooth out some of those rough edges that come with sharp market downturns like we saw at the beginning of 2020. Fixed income can also allow you to rebalance your portfolio during market corrections or recessions so you can take advantage of lower equity prices in a systematic way. While none of this is very exciting, the last place any of us should be looking for excitement now-a-days is in our ability to fund our retirement. Slow and steady will win the race.