For decades, diversification meant filling your portfolio with the right mix of stocks and Treasury bonds. This year, investors who went that route are suffering the worst losses since the 1930s.
Take a standard split of 60% stocks and 40% bonds. Normally it earns a relatively steady 7% a year over the long term. But that portfolio is down 19% YTD . . . miserable and not even remotely matching expectations.
And both allocations are suffering. The S&P 500 remains on the edge of 20% bear market territory, but when that happens, bonds usually pick up the slack or at least remain a reservoir of value that holds up relatively well.
That’s the “defensive” role bonds play. This year, however, Treasury prices are down 20% even counting the relatively low dividends you might have locked in if you bought them in recent years.
Between the Fed and inflation, Treasury remains “trash.” And that’s a big problem for investors who trusted the 60-40 plan to cushion their returns from transient volatility in the stock market.
I’ve been vocal about avoiding Treasury debt since the pandemic got rolling. There just wasn’t any point in holding bonds in a world where interest rates were as close to zero as it gets, especially when inflation practically guaranteed that the principal wouldn’t stretch as far when you got it back.
Stocks made more sense in that world. And now that stocks have stumbled, there’s zero shelter in the conventional portfolio.
What would have worked better? Start with the stocks that are actually growing fast enough to “behave like stocks” and provide a reasonable return profile. That’s what you want in the 60% allocation while we wait for the market as a whole to recover.
This year, it’s all about energy. All you really need is an equal split across the biggest oil stocks in the country, ExxonMobil (XOM) and Chevron (CVX). You can get more intricate from there, but there’s no need.
XOM and CVX are as close as it gets to being pure plays on oil. They’re booming. And they have zero desire to slow down any time soon.
Assign an arbitrary 30% of a portfolio to XOM and another 30% to CVX and you’re looking at 26 percentage points of gain YTD.
Then replace those bonds with stocks that behave like bonds. By this, I mean “boring” stocks that aren’t growing fast (or at all) but they generate enough cash to pay decent dividends.
Some stocks yield a lot. Again, you don’t need to get fancy. Even if you focus on four dividend stocks that pay 3% or more, it’s all you need.
I love Big Pharma for this. Assign an arbitrary 10% of your portfolio to each of these four big drug stocks: Merck (MRK), Amgen (AMGN), Bristol-Myers Squibb (BMY) and AstraZeneca (AZN).
Coincidentally, they all pay roughly what 6-month Treasury debt does right now, about 3.2%. And they’re up a collective 8.56% YTD.
If that’s your “bond” allocation, you’ve made another 3.4 percentage points. And all in all, you’re up close to 30% YTD.
Six stocks. That’s all it took.