The world of traditional money management is patting itself on the back these days.
For once… its strategy worked.
Its oh-so-bland recipe for mediocrity finally gave us what it promised.
If you followed the textbook advice and put 60% of your money in stocks and the other 40% in bonds, you just had the best quarter in a decade.
The strategy was good for a gain of slightly more than 9%.
That’s right. Thanks to a near-perfect combination of interest rates and equity bullishness, the strategy that so many folks have been told to depend on for their financial freedom paid out slightly more than the stock market’s long-term average.
If you can’t tell… we’re not impressed.
Wait… That’s It?
The figures and the self-gratification of the money crowd prove what we’ve said all along. Do what the crowd does… and you’ll get what the crowd gets.
The folks who get paid to advise folks into such a strategy say the last three months were a “perfect storm,” but in a “good way.”
They say thanks to the Federal Reserve’s sudden dovishness, bond prices soared and the bulls regained control of the stock market.
None of their celebration is wrong.
Indeed, the strategy greatly exceeded its typical pace during the quarter.
But celebrating the feat is like giving a treat to a dog that finally caught up to the car’s back bumper.
It’s rewarding ignorance.
All of this is more proof of the concept we’ve been rambling about for a while now.
What used to work… worked in the past.
Sorry, Buttercup. Times Have Changed
It’s time for something different.
The 60-40 rule made sense when it was first touted. In an age where blue chip bonds paid 8%, you could expect your money to grow at a healthy clip.
But in a world where the stock market collapses as the 10-year hits 3%… my, have things changed.
The days of buy and hold are dead.
As we’ve said… now it’s buy and pray.
Think about it this way. Over the last five years or so, the bond side of the 60-40 equation has done virtually nothing. Investors who parked nearly half their money in the debt market were just as good burying it in the backyard.
Stock returns have carried the weight.
That’s fine. Until it isn’t.
We say 60-40 investors are in for a grand disappointment.
As if a decade of mediocrity weren’t enough, now it’s time for a decade of despair.
That’s because, as we’ve said so many times, interest rates are dead. The Fed is stuck. It can’t raise rates. Government debt will come with a negative rate long before we ever see anything that’s considered “normal.”
But the same can be said of stocks.
They’re threatening to top out and go backward.
That’s the scary part.
Normally, the 60-40 method of investing provides some balance. When stocks fall… bonds surge. But these days, it’s looking more and more like stocks will fall right alongside yields.
If we were to enter a tough recession tomorrow, 60-40 investors would be in for a world of hurt. Their safety net would be gone.
Try This Instead
But what good is some grumpy idea without a bit of optimism? What good is all this advice if we don’t offer a solution?
The answer here is simple.
Toss aside all that traditional investing literature. It’s a brand-new world, a near-zero interest rate world.
You must find other creative ways to produce income.
Lots of folks are turning to things like real estate, business development companies (BDCs) and the like.
They’re all good ideas.
But we also propose treating the stock market like an income machine. Short-term trading used to be the strategy for the “hobbyist” investor. Now jumping in and out of volatile stocks appears to be the only thing that can hedge a bear market.
For ideas of what that looks like, go back and read some of our essays from the past month.
Again… forget old notions that worked when the math was different.
Our rotary phones are in the trash. It’s time for many of our traditional strategies to join them.
It’s time for something new.
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