Broker Check

One Size Fits All, Poorly

| September 19, 2022

I’m lucky enough to live near the theme parks. You could say I’m Happiest Place on Earth adjacent. Because of that Central Florida is a great place to raise a daughter. She has no idea how lucky she is to be 15 minutes from magic. However, Central Florida is also the afternoon thunderstorm capital of the world. Actually, I just made that up. But still, every day between 2pm and 5pm from June to mid-October, we get strong rain with thunder and lightening.

When you combine the theme parks and rain storms you have families running for the gift shops to purchase rain ponchos, en masse. They come in two sizes: child and adult. My daughter is fine with the child size, because there’s not that big of a difference between children under the age of 12. However, the adult one size fits all is comical. You see tiny jockey size men and linebacker size women. Viva la variety and all that. One size does not fit all people well.

Wall Streets job is to provide financial rain ponchos to retail retirement investors. So they package asset classes for a purpose and give them cute names that indicate their utility. The age-based mutual fund in every 401k is a great example. The concept is that you pick a fund based upon the date of your retirement. So a typical 40 year old might choose the 2040 fund. This fund gets more invested in bonds as 2040 appears.

It's all based on age. If we are in bull market, the allocation follows the same glidepath of reducing equities as when we are in a bear market. It’s scalable and based on common sense. As you approach retirement you need less growth and more income. You need less volatility and more stability. Historically, this has made for a prudent investment decision.

Another Wall Street poncho is the 60/40 strategy. Essentially, smart people realized that 60% equities and 40% fixed income was the sweet spot for risk-adjusted return. Why? Because, ostensibly. When equities decline, fixed income rises. As recession appears, interest rates drop and bonds become more popular. As the economy recovers, stocks rise, rates rise and bonds are no longer so attractive. By being diversified you get to have the best of both worlds.

And then 2022 happened. Inflationary pressures, stock market declines and rising interest rates have created a terrible environment for both the evergreen 60/40 and your garden variety age-based 2020 fund. The statistics from the past tell us that it’s very rare for stocks and bonds to decline simultaneously for long periods of time.

But you are a person, not a statistic. And one size doesn’t fit all. If  you’d like to discuss how to fix this issue in your portfolio click here.