While long-term investing is the most effective way to build and maintain wealth through the stock market, there are a number of ways that investors can apply this strategy to their personal portfolio.
One popular method is the 60/40 approach, which involves allocating your portfolio 60% to stocks and 40% to bonds. In this segment of Backstage Pass, registered on November 17, Fool contributors Rachel Warren, Travis Hoium and Connor Allen discuss whether this approach can still work in the current market environment as well as some actions investors should consider to help fight inflation.
Rachel Warren: Barron recently released a report saying that the classic 60/40 portfolio investment approach, 60% stocks, 40% bonds, they say this formula is no longer. It’s dead. According to the article, “very high stock prices, low interest rates and the growing tendency for the two asset classes to move in parallel have caused most advisers to abandon the formula.” Barron also reported that financial advisers are moving away from the 60/40 approach in a number of ways.
One of them is to encourage clients to invest more in publicly traded stocks, as well as exchange traded funds, and to move away from such a high concentration of bond investments.
My question is this, we talk a lot about asset allocation here at Motley Fool, including the 60/40 rule, and more importantly, the value of diversifying your portfolio into quality stocks across a wide range. of industries and sectors and holding them for many years. I’m curious what you both think of the 60/40 rule.
How has your investment strategy changed over time? In today’s high inflation environment, have you made any changes to your approach to buying stocks? Take this one first, Travis.
Travis Hoium: I haven’t implemented anything like 60/40. I am 100% invested in equities. I think the way I think about managing my portfolio and helping my family members do the same is to think about the risk profile of the different parts of your portfolio.
When I buy a share like Apple, I see this very differently than buying a stock like Nvidia. Same thing with a company like Verizon. I don’t necessarily expect a strong price appreciation from Verizon, but you get a great dividend yield. Another example would be NextEra energy partners. You buy a dividend, you buy assets that produce energy for 20, 30, 40 years.
It’s kind of like buying a bond, but you get some of those aspects of stocks as part of that. It’s the way I look at it to be kind of comfortable with the risk profile of the whole portfolio. You asked questions in an imaginary and inflationary environment. As inflation has become a feature of our market discussions, more and more. I have thought about who will really benefit from it and a company that keeps coming back to me is MGM Resorts.
If you watch Las Vegas is booming right now, they are bringing in record income on a monthly basis from the gambling side. They still haven’t quite returned to the bedroom revenue side as the big parties and events aren’t back yet. But if we see inflation, we’re going to see hotel rates go up. We’re going to see people looking at a $ 100 token, maybe like they were looking at a $ 50 token.
There might be a bit more gambling and the expense to build these casinos has been fixed in the ground, in some cases decades ago. The benefit to them is really going to be huge. It really is an exploitative leverage game. It is a kind of business that, in an inflationary environment, could have favorable winds for it. It is one thing to watch out for.
Connor allen Yeah. Travis, I like the part where you talk about having a risk profile for different stocks in your portfolio. I know a lot of companies that you can invest in to get that bond-like return are the ones like Southern Company who have contracts of 30, 40, even 50 years.
These revenues are not going anywhere. It is very safe. It’s not a high growth company, but it’s something that could act like a bond in your portfolio, so I like that approach. That being said, I’m also 100% in stocks and always have been. I never even touched a link.
I’m not the best person to ask, but I don’t think the 60/40 wallet is dead. But I think if that’s the way you invest, I don’t think it’s time to jump ship. I think this is a great approach and has worked for decades.
When stock prices go down, take money out of bonds and put them in stocks and when bond prices go down, flip. I think if this is the way you invest, do it and stick with it.