Ongoing market volatility has left many investors grasping for an investment lifeline to help them stay afloat amidst stormy economic conditions. Conventional approaches to long-term investments follow the 60/40 model (opens in new tab), which allocates 60% of your portfolio to stocks and 40% to bonds. But that strategy may no longer produce your desired results, as both asset classes have performed under their historical averages during the last two decades.
Bond yields historically had an inverse relationship with the stock market to help offset loss. But in 2022, inflation and other global economic factors caused both bonds and stocks to fall. Anyone relying on the 60/40 model is likely finding themselves in deep water. Modern market conditions require a fresh approach to long-term investing in order to properly protect your retirement savings.
Catch Up With the Times
When the 60/40 model was originally developed, the S&P 500 historically averaged a 12.1% (opens in new tab) return (from 1957-1999). Since 2000, the S&P 500 has averaged a 6.3% (opens in new tab) return. For anyone using the 60/40 model, 60% of their portfolio is now yielding half of its historical average.
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Current investors are faced with slower worldwide economic growth, high inflation and rising interest rates, which demands an updated investment approach.
In addition, computer technology has allowed the stock market to move at lightning speed as billions of dollars are traded in nanoseconds, leading to more volatility. When the market crashed in 2020, stocks lost a third of their value in just 33 days (opens in new tab). During the Great Depression, it took four years to see that same level of loss. Wall Street is a whole new ball game, and if you don’t adjust your investment tactics accordingly, you may find yourself trying to recover from unnecessary market losses.
Leverage Consistent Strategies to Offset Volatility
To make headway in a volatile market environment, investors need to create consistency in their investment approach to prevent emotions from getting in the way of decision-making. Buying low and selling high is counterintuitive to most people. To make it effortless, look to utilize dollar-cost averaging (DCA), …….