While the battle for the White House mattered as much to Wall Street as Main Street, the dominant mood is relief that the long campaign season is over. It’s time to look to the future.
Investing is all about playing the cards the world deals you. Sometimes, the opportunities fall right into your hand. In other seasons, you draw nothing but obstacles that need to be overcome.
And occasionally you just need to fold. That’s the position Treasury bondholders are facing.
After all, Fed Chairman Jerome Powell is probably going to run the Federal Reserve for the foreseeable future. No matter who ends up with the most votes, he’ll keep calling the shots in the bond market.
The 60-40 Portfolio Is Dead: Time to Pivot Your Portfolio
For decades, retail investors counted on a fairly simple portfolio to protect their assets and make money across the market cycle: 60% stocks, 40% government bonds.
The bonds were effectively ballasted, paying a few percentage points in annual interest while promising to return your initial capital in full when they matured. There was no risk and minimal real returns.
That was okay because the 60% stock allocation did most of the long-term work. Stocks simply make more money than bonds. Unfortunately, they’re also a lot more volatile.
Time to Pivot Your Portfolio: Consider Apple and Microsoft
Any given stock can become the next trillion-dollar giant like Apple Inc. (NASDAQ: AAPL) or Microsoft Corp. (NASDAQ: MSFT). But even the winners will suffer through extended periods of losses along the way. At such times, bonds can provide a vital cushion.
I still love stocks. We’re doing great things in my IPO Edge, where subscribers are now cheering their fourth triple-digit-percentage win of the year (up 119% as I write this) and looking for a truly spectacular 2021 score.
My GameChangers subscribers aren’t crying either. The current portfolio is on track to provide what I’ve delivered for the past decade: a solid double-digit-percentage annual return in a much shorter holding period that is independent of the market as a whole.
On that basis, the 60% end of a conventional portfolio is doing just fine. The problem is on that other 40%, featuring bonds, that Jay Powell effectively controls.
The Fed Is Not Your Friend: Time to Pivot Your Portfolio
I don’t have anything against Chairman Powell. He’s doing heroic work supporting the markets while we all recover from the pandemic. On that level, the Fed is every investor’s friend.
But because the Fed’s support takes the form of massive bond buybacks, Powell’s flood of free money has pushed Treasury prices beyond rational levels. And since rising prices depress the associated yields, these securities now pay less income than any sane investor would tolerate.
All government debt now carries a lower effective interest rate than ambient inflation. In other words, while you’ll get your money back when those securities mature, it will buy less than it does now.
Are you a Bond Owner? It is Time to Pivot Your Portfolio
Buying bonds today is a guarantee that you will lose purchasing power throughout the holding period. You’re locking in a slight but significant loss.
And, if 40% of your portfolio follows that math, your stocks need to work even harder just to keep up with the minimal inflation we see now. If the Fed’s heroic efforts erode the value of the dollar, inflation will pick up and your bonds will do even worse.
Interest Rates Will Stay Low for a While: It is Time to Pivot Your Portfolio
So much for “safety.” Powell said it again this week: interest rates will not rise until inflation trends well above 2% for an extended period of time.
I don’t anticipate Treasury debt becoming interesting again to retail investors before 2022, at the earliest. In the meantime, you don’t need to play the Fed’s game.
Banks and insurance companies need to buy Treasury bonds to meet regulatory capital requirements. They can’t own stock under those terms.
Unlike Banks and Insurance Companies, It is Time to Pivot Your Portfolio
You, however, are not a bank. What you need from your portfolio is a good long-term growth profile and current cash flow to smooth the rough patches when selling stocks would only lock in a loss.
I’m telling every elite investor and every TV news channel that Treasury is trash for the foreseeable future. When your bonds mature, don’t buy new ones.
Roll that money over into dividend stocks instead. Companies like General Mills Inc. (NYSE: GIS) and 3M Inc. (NYSE: MMM) are practically as safe as the U.S. government.
Time to Pivot Your Portfolio, So Consider Johnson & Johnson
The stocks will rise and fall, but it would take a complete disaster to wipe them out. Johnson & Johnson (NYSE: JNJ) actually has a better credit rating than the government. If it defaults, we all have bigger problems to worry about.
These companies pay around 3% a year. After ambient inflation, that’s still a positive number. Even if inflation spikes to levels we haven’t seen in over a decade, you won’t lose money here.
As long as you’re happy cashing the quarterly checks, it doesn’t matter where the stock goes. Patient investors can lock in even bigger yields in perpetuity, which is what we do in Value Authority.
Time to Pivot Your Portfolio, Whether Stocks Surge or Not
If the stocks surge, it’s a bonus. Think of selling as cashing years or even decades of dividends at once. The only challenge then is finding a new income stream to replace the 40% of your portfolio that currently may be devoted to bonds.
My proposed substitutes are “bond-like stocks.” They play the role that Treasury debt once did, but they have the advantage of actually making money, while we wait for Jay Powell to finish his work.
And if you’re looking for my take on the election, we’re talking about that on my Millionaire Maker radio show. Now there’s a podcast as well to keep you focused on opportunities to build real wealth while avoiding obvious threats. (Click here for a list of stations and archived episodes.)