What is the Anticipated Return on a 60/40 Portfolio Over The Next 10 Years?

Mark Elliot: Welcome back to The Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group. As we talk about every week on the program, there are over 300 videos on the YouTube channel. Just search Troy Sharpe and Oak Harvest. There’s no cost whatsoever. You subscribe that way, you’ll get the information when the new one is popped up but you think about it.

Any financial retirement question you have, there’s probably a video on that on the YouTube channel. Just search Troy Sharpe and Oak Harvest. If you have questions though and you’re like, “You know what? I want to know about my situation.” Call the team. They’re here to help if they can. They just don’t know if they can help you until you reach out. 800-822-6434. 800-822-6434. I’m Mark Elliot. Glad you’re with us.

We’re talking about how in the world do you retire in a bear market? We know that Warren Buffett’s theory is, “Be fearful when others are greedy.” Well, right now everybody’s fearful because the markets are going in the tank right now, so that means, Warren Buffett says, “Well, be greedy when others are fearful.” Well, there’s a rhyme to reason. You got to think about how you should do position yourself in certain situations.

Everybody’s in a little bit different situation, Troy. I think that’s really the bottom line, no matter where we are, whether we’re 10 years out from retirement, we’re 10 years into retirement, or anywhere in between, being fearful when others are greedy or being greedy when others are fearful, it makes sense but it’s really about us and it’s about our situation, which is why we need your guidance.

Troy Sharpe: Also, what Mr. Buffett there is referring to is someone with an indefinite timeframe. This is one of the reasons why you have to be very careful with which advice that you follow.

Mark: You’re saying Warren that has several billion dollars has the ability to take some chances when he wants to?

Troy: Well, he’s not worried about ever running out of income. He’s not worried about how he’s going to pay medical costs later in life. He’s not worried about what the market does necessarily because he invests on an infinite timeline. Even when he’s gone, that money, those principles, he’s always in the accumulation phase, meaning he is always, as an investor, investing for long-term growth.

Now, I’m not saying you shouldn’t keep that mindset in retirement but you also have to understand there are entirely different dynamics at play. In retirement, your plan needs to be more customized to you and your situation, your income needs. How much money you have in qualified 401(k)s or IRAs? Mr. Buffett probably doesn’t have any money in retirement accounts. If he does, it’s very, very, very minuscule relative to his overall wealth. He is not worried about, “Well, how much should I take out of my retirement account and how much should I take out of my non-IRA assets?” There’s certain elements when it comes to retirement that simply do not apply so you have to be very, very careful who you listen to.

Now, if your portfolio has what we call a high capacity for risk, this means that you don’t need to take a large withdrawal from that portfolio. Then you’re more in line, at least, probably not– you don’t have billions of dollars probably, but at least for the portion you invest in equities, you can have a much longer time horizon one beyond your lifespan. Then in that particular scenario, yes, then that makes sense to follow that type of advice, keeping a very, very long-term mindset. Most people in this country, they’ve worked their entire lives, they have $500,000 saved. They have $800,000 saved. They have $1.2 million saved, 1.6, 2.2.

If you’re in that range, and I consider wealthy personally where you don’t have to worry about this stuff once you start to get above $5 million. Now, that is a relative, I want to be careful there because that is relative and it’s relative to the amount of income you spent. I had a client several years ago, when he came to me, he had a ton of money saved but he was an exorbitant spender. Even though he had close to $10 million, based on how much he spent, he was not in any different of a position than the average person that’ll come see us that has a $1 million or $2 million or $3 million, or $700,000. It’s relative. I do want to keep that in mind.

I want to switch gears here. First and foremost, this is The Retirement Income Show. I’m Troy Sharpe. If you don’t have a full retirement plan that we talk about knowing where your income’s coming from, what you’re doing from a tax planning perspective, how are you taking advantage of this bear market from a tax planning opportunity, give us a call. Let’s sit down, let’s talk about your situation, and start to build a retirement customized box around you as opposed to having that box that’s already pre-made that most firms have tried to fit you into. 1-800-822-6434.

Getting back to this paper I talked about in the first segment, BlackRock, Goldman Sachs, JPMorgan, they contributed, Lincoln Investment advisors put this out. I want to ask you, Mark. Over the past, the study goes back to 1976 all the way through 2021, what was the average 60/40 portfolio return? What do you think, annualized?

Mark: Since 1976?

Troy: 1976 to 2021.

Mark: I would say it was around 11%.

Troy: Wow, 10.9. That’s actually really–

Mark: Is that right? Wow.

Troy: Yes.

Mark: I like it.

Troy: Over that timeframe, average US stocks returns were 13.4% and average US bond returns were 7.3%. The data comes from Morningstar. They use the S&P 500 total return, which is the index that includes dividends. Then for the bond component, they use the Barclays US Agg, A-G-G, which has trillions and trillions of dollars. It’s the biggest bond fund I believe in the world. 13.4% for equities, 7.3% for bonds. Now, so JPMorgan, Goldman Sachs, BlackRock, and State Street, all have their expectations out for the next 10 years, their forecasts.
What do you think the average if we look at JPMorgan, Goldman, BlackRock, and State Street the 60/40 portfolio, over the next 10 years, what do you think the anticipated performance of that portfolio is?
Mark: 2%.

Troy: It’s a little under, but 4.5% is what they have there. The range of equity returns for US stocks from those four institutions that manage probably $20 trillion, $30 trillion of assets, 5.16 on the low side, 7.4 for US stocks on the high side. JPMorgan’s got the lowest, Goldman has the highest, but looking at JPMorgan, Goldman, BlackRock, and State Street, the average 10-year forecast, annualized return for the S&P 500 is 6.14%. Now, when we look at bonds, it’s 2.14% the average.

If we do the average from those four institutions, so if we take a simple weighted average, 60% of your portfolio is in stocks, 40% is in bonds, you’re looking at about 4.5%, which is 50, 60, probably it’s called 60% less than the previous about 44 years, 45 years average return of that same 60/40 portfolio. In short, from 1976 to 2021, the 60/40 portfolio averaged 10.9% per year. Goldman, JPMorgan, BlackRock, and State Street looking forward in their estimates for that 60/40 portfolio when combined according to this Lincoln Investment advisors report, 4.5%.

Why is this important? What does this mean for you? First and foremost, the reason why bonds did so well over the past 40 years in this what we’ve talked about here, they average 7.3% per year, and this is high-quality investment grade bonds, 7.3% per year. The reason is because interest rates were coming down is the primary reason. As interest rates go down, bonds have capital appreciation, they go up in value. Not only was that bond portfolio earning a very high coupon or interest payment, it also had capital appreciation of the principle.

Now, moving forward, most people are on board with interest rates will not be decreasing for the next 10, 20 years. They probably will increase over the next year to two. They could stabilize. They could come down slightly if we look at the Fed’s dot plot or dot chart, but all of that is really just guessing at this point. The point is we know bonds simply don’t have the same opportunities for growth as they did over the past 40 years because 40 years ago, interest rates were much higher and they had a lot more room to come down.

When you’re doing analyses of your situation and possible outcomes, we need to really bring down our expectation of return because most pundits out there on television, when they talk to you about the stock market, they’re quoting historical data. Now, I’m not going to name names here, but when you hear someone saying, “The market’s going to average 10% or 12%.” If you’re in retirement or in your 50s and getting close to retirement, you cannot count on that happening. If it happens, great. You’re going to be much better off than you would have otherwise, but we don’t plan for the best-case scenario.

What we want to do is plan– We want to have an understanding of the best case. We also want to have an understanding of the worst case. Then we want to have some moderate case in the middle. We want to be making our planning decisions based on that lower half, that worst case to mid-case. That way, when we’re planning that way, if it’s better, the probability and the odds of us being successful in retirement, they go up. If you simply stick to a 60/40 portfolio, which again, we think that is antiquated. If you’ve listened to me for any number of years, or anytime before, you’ve probably heard me say that the theory, the concept of that 60/40 portfolio is antiquated.
We have to be considering other low-risk assets that give us an opportunity to earn higher rates of return with more safety of principal but also with additional benefits. When you look at your choices out there, we want to understand that first and foremost, bonds are a tool. They are a tool that is not expected to perform quite well moving forward. Then we have to understand what are some other tools out there that we can look at and compare and add to our portfolio possibly, that give us more value. That’s what we really want to find in retirement is value.

Quite honestly, I’m just not seeing a lot of value in bonds at this time. 1-800-822-6434, this is The Retirement Income Show. I’m Troye Sharpe. When you give us a call to sit down, what we’re going to do is, first and foremost, we get to know you and your situation and who you are so we can start to build the foundation of a customized retirement plan. This starts with understanding risk tolerance and risk willingness, building an investment strategy, goes into building a specific and customized income plan. We want to see multiple streams of income coming to you in retirement from multiple different places.

We want that income to be coming in regardless of if the markets going up or down. It’s a very, very important concept there. Next step is a tax plan. For many of you out there, when we run this analysis, we’re seeing hundreds and hundreds of thousands of dollars in potential savings. It’s simply from not going down the traditional or conventional wisdom path of letting those IRAs and retirement accounts defer, defer, defer. Everyone’s plan is customized, and for you, there’s a specific path that makes the most sense or at least a range of paths. That’s step three, the tax plan.

Then, of course, we have the health care plan. We’re going to talk about this in the next segment. Some really interesting options to explore for long-term care and health care if that’s important to you. Then the final thing is the estate plan. Those are the five core components that we want to make sure we have a plan in. When you have those in place, what it means is that your future is more clear, you know where you’re going, you can have less anxiety in times like this when the market’s down.

It starts with giving us a call and sitting down and taking that first step to just simply get to know, “Hey, are we a good fit for each other? Is there something you can be doing to help me out? Is there something I should be doing differently that I’m not aware of, or maybe my advisor is not aware of?” 1-800-822-6434, simply leave a message. We’re going to give you a call back on Monday, and we look forward to talking with you at that time.
Mark: Here’s the deal. We want to retire when we want to retire, which means you need a plan, and that’s why Troy and the team at Oak Harvest walk you through the investment plan, the income plan, the tax plan, the health plan, the estate plan. It’s all in there, so security, when and how do we do it? Well, that’s in the income part. What about Medicare? Well, that’s in the health care part.

There’s just a lot of moving pieces here, and you don’t want Washington or Wall Street to dictate your life. We have to take into account their decisions, which affect you, but it’s really about you, your situation your plan. Troy and the team, obviously, here to help if they can, 800-822-6434 headed to our final segment right after this. This is Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group.
Operator: Oak Harvest Investment Services is a registered investment advisory firm. Troy Sharpe is an investment advisor representative and insurance professional. Investing involves risk including the potential loss of principal.