Should You Allocate 100% of your Portfolio to Fixed Income?

Transcript:

Jared Kizer: All right. So today I'm going to tackle a question that I recently got from a client that I think is a good topic to tackle, which is the question of are there any scenarios where I should allocate all of my wealth to fixed income without any allocation to say stocks or alternatives of any kind? Are there scenarios where that makes sense? Want to talk about that today and basically think there are a couple of cases, but by and large we're going to talk about why we think that doesn't make sense. Interesting question nevertheless to tackle because of course, we have seen interest rates go up a lot over the last couple of years. So this was certainly a question that we wouldn't have gotten probably two or three years ago because rates were so low by and large. This was not probably a great or even feasible approach for basically any situation, but certainly a reasonable question today to ask now that we have seen interest rates go up. So let's start with the situations, just a couple where I think this type of approach could make sense.

There is a Fixed Dollar Goal

Jared Kizer: The first would be where you have literally a fixed dollar goal, an exact amount of money that you know today that is due at some point in the future. And you say, I want to set aside that amount or something slightly short of that amount entirely in fixed income to cover that goal in the future. Because I know exactly with no doubts whatsoever what the dollar amount of that goal is going to be. So that would be situation number one, where that could make sense, not necessarily a common situation, but you do see this every now and again.

Your Investable Wealth Far Exceeds Your Spending

Jared Kizer: Situation number two, also not terribly common, but a great situation for those folks that find themselves in this situation would be where you've got so much investable wealth relative to the amount that you're trying to spend over time that virtually any allocation could achieve the goal that you're trying to achieve. Again, not a situation unfortunately that a lot of folks are in, but for those that are, certainly a great situation in that case, certainly an allocation entirely in fixed income or something closely approaching, that could make sense. Now let's talk about the balance of the cases, which are cases where I don't think this is typically the best long-term approach to take.

Fixed Income Allocations Do Not Have the Lowest Volatility Over Time

Jared Kizer: And the reason is going to be maybe somewhat surprising is that you actually do not see historically that allocations that are entirely fixed income have the lowest volatility over time. May be a little bit surprising because you think of well wouldn't allocating all of my portfolio to, say, U.S. Treasuries be the lowest risk approach over time or the lowest volatility approach and you actually don't find that. What you find historically is that an allocation of, say, 5% to 10% to stocks historically has actually produced a lower volatility total portfolio than being entirely allocated to fixed income. Why is that the case? Surprising because stocks are, of course, very, very volatile. But what you see there is a basic diversification effect. You see that there are periods like 2022 and other examples that would be even better periods that are very, very difficult for fixed income, that might not be quite as difficult for stocks. And therefore you're offsetting some of the risks of fixed income with that ever so slight allocation to stocks.

Consider Treasury Inflation-Protected Securities (TIPS)

Jared Kizer: Last thing I would say just in general, for folks contemplating very, very high percentage allocations to fixed income, you might want to consider a sizable allocation portion of that allocation going to inflation-protected securities. So hopefully that's some helpful perspective on thinking about 100% allocations to fixed income when they might make sense, generally when they don't tend to make sense. If you have other questions you like for us to tackle, feel free to share those with your advisor or click the link below and submit questions in that way. Thanks.

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