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Back to the Future 60/40

Key Takeaways

Inflation regimes impact the returns of a 60/40portfolio
60/40 portfolios are effective in a range bound inflation environment
Along with stable inflation, there are other tailwinds to support the efficacy of the 60/40 portfolio

As students head back to school and are getting ready for another year of learning, we question whether we should learn from history and whether it’s time to go back to the 60/40 portfolio for future goals.

We have been here before

Just as the equity market sees cycles of being in and out of favor, there are plentiful articles about the death and rebirth of the 60/40 portfolio. This is a portfolio comprised of 60% equities and 40% bonds, which has generally stood the test of time and become the defacto portfolio for many.

But what about 2022?

2022 felt very different, and the 60/40 portfolio tumbled as we saw markets move together with high inflation and the Federal Reserve raising rates at a very fast pace. Historically, periods of extreme inflation are the worst for 60/40 portfolios. For example, real returns (which take into account the impact of inflation) for the 60/40 portfolio were negative in the 20-year period 1962-1981 of extreme inflation.

The impact of inflation regimes

Whether the cycles are longer-term secular, or shorter-term cyclical, the impact of inflation on portfolio returns is similar.

Periods of falling inflation are the best for the 60/40 portfolio. Think back to the 1980s through the 2020s—it was generally a great time to be invested. Average returns for the 60/40 portfolio at 16.1% were not far behind the equity market at 17.2%. And in real terms, it was a 9% return. To feel good, all an investor needed to do was to get market exposure.

Periods of rising inflation are generally the hardest times for 60/40 portfolios. Looking at the secular cycle from 1944 to 1981, the average real return for the 60/40 portfolio was 3.0%. During the past 50 years, the average return was lower at 2.1%. Equities tend to struggle, given concerns about Federal Reserve moves and the potential for recession. These are times when active management and inclusion of strategies that are not tied to the moves of the equity and fixed-income markets can help a portfolio.

Periods, when inflation is more stable or range-bound, tend to offer reasonable returns for the 60/40 portfolio. Investors are not so worried about the economic environment and more focused on the outlook for growth. During these periods, equities averaged a return of 13.0%, with the 60/40 portfolio not far behind with a return of 10.2%.

What should investors do?

Inflation has come down substantially from its high of 9%, and whether it will hit the Federal Reserve target of 2% or not, it’s likely to be more range-bound going forward. After falling to 3% in June, we saw CPI increase to 3.2% in July.

In this environment, we believe the 60/40 should hold up not only due to a more stable inflation regime but also due to a couple of other tailwinds.

Correlations are reverting back to normal, and bonds are again providing a stable anchor to portfolios.
After tough years like 2022, the longer-term outlook for returns increased and is shifting toward long-term norms.
We’re starting to see a broadening of market drivers allowing active management and diversification to benefit.

But just remember that not everything is going to work in the portfolio in every period. If it did, you’re not properly diversified! The diversified 60/40 portfolio is built to help smooth the ride for the long term.

Important Information

This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800 664 5345.

Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation. It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Index performance assumes the reinvestment of dividends.

Investments in equities, bonds, options, and other securities, whether held individually or through mutual funds and exchange traded funds, can decline significantly in response to adverse market conditions, company specific events, changes in exchange rates, and domestic, international, economic, and political developments. Bloomberg® and the referenced Bloomberg Index are service marks of Bloomberg Finance L. P. and its affiliates, (collectively, “Bloomberg”) and are used under license. Bloomberg does not approve or endorse this material, nor guarantees the accuracy or completeness of any information herein. Bloomberg and AssetMark, Inc. are separate and unaffiliated companies.

AssetMark, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. AssetMark, Inc. 1655 Grant Street 10th Floor Concord, CA 94520 2445 800 664 5345 ©2023 AssetMark, Inc. All rights reserved. 106297 | C23202800 8/2023 | EXP 0 8/31/2025

US Credit Rating Downgrade

Key Takeaways

Ratings agency Fitch downgraded the US government credit from its highest rating of AAA to AA+
The downgrade reflects “erosion of governance” from repeated debt ceiling standoffs and rising debt.
The downgrade, however, does not reflect new fiscal information and is unlikely to have material impact on financial markets.

What happened?

The rating agency Fitch downgraded the US government credit rating one notch from AAA, its highest grade, to AA+ on August 1, 2023. The justification was rising debt, fiscal deterioration, and “the erosion of governance” from repeated debt limit standoffs. Fitch issued a downgrade warning back in May 2023 following the debt ceiling debate. This is the second downgrade for US credit. S&P downgraded the US credit rating to AA+ from AAA back in 2011, when the political standoff also led to a prolonged debt ceiling debacle. Interestingly, the third well-known credit rating agency, Moody’s, currently still has the US credit rating at the highest level of AAA.

Why do credit ratings matter?

Credit ratings are an assessment of the creditworthiness of an individual, business, or government entity. For individuals, generally having a higher credit score could have several benefits, such as potentially lower mortgage rates compared to those with a lower credit score. Similarly, a lower credit rating for the US could make it more expensive for the government to borrow money, thus potentially raising costs for taxpayers. This could also push yields on US government debt higher, as investors demand a greater premium to be assured they will be paid back in full.

How can this impact investors?

So far, the Treasury market’s response has been benign, while stocks slid modestly lower. The yield on the 2-year Treasury fell, while the yield on the 10-year Treasury rose slightly. Concerns of a forced selloff from institutional investors from a downgrade are unlikely as many institutional investors had already prepared for the move by changing mandates to specifically refer to Treasuries rather than AAA credit rating. This reflects the importance of US Treasuries, given the sheer size of this market. Looking ahead, US Treasuries could also benefit should the cooling economy head into a recession.

Conclusion

The US faces serious long-run fiscal challenges with a large debt, deficits, and political brinkmanship that makes the best of us question the strength of the world’s largest economy. However, the decision by Fitch to downgrade the US debt appears strange, given it’s months after the debt ceiling stalemate has passed and the economy is relatively resilient and surprisingly stronger than many had expected. The downgrade does not reflect any new fiscal information and is unlikely to have a material impact on financial markets. This latest ratings cut by Fitch in some ways is similar to the debt ceiling debacle earlier this year, which leads to some short-term anxiety but does not amount to much else.

Important Information
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800 664 5345.

Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation. It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Index performance assumes the reinvestment of dividends.

Investments in equities, bonds, options, and other securities, whether held individually or through mutual funds and exchange traded funds, can decline significantly in response to adverse market conditions, company specific events, changes in exchange rates, and domestic, international, economic, and political developments. Bloomberg® and the referenced Bloomberg Index are service marks of Bloomberg Finance L. P. and its affiliates, (collectively, “Bloomberg”) and are used under license. Bloomberg does not approve or endorse this material, nor guarantees the accuracy or completeness of any information herein. Bloomberg and AssetMark, Inc. are separate and unaffiliated companies.

AssetMark, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. AssetMark, Inc. 1655 Grant Street 10th Floor Concord, CA 94520 2445 800 664 5345

IRS Delays New Catch-Up Contribution
Rule Until 2026

The IRS has clarified that catch-up contributions will be allowed in 2024 and beyond.

The IRS recently announced some welcome news for higher-income workers with 401(k)s and similar retirement plans. The agency delayed implementing a new rule that would have required catch-up contributions made by people earning over $145,000 to be directed into an after-tax Roth account.

The rule change was originally set to start in 2024, but will now be postponed until 2026 thanks to the new two-year administrative transition period. This gives

savers who are both nearing retirement and earning over $145,000 two additional years to make catch-up contributions on a pre-tax basis.

Why the IRS Announced This

The Roth catch-up requirement is a part of the SECURE Act 2.0 signed into law in late 2022. A provision of the legislation mandated that starting in 2024, any catch-up contributions made to a 401(k) or similar workplace retirement account by someone earning over $145,000 in the prior year must be made on a Roth basis. With Roth contributions, you pay taxes on the money upfront in exchange for tax-free growth and withdrawals.

In a separate issue, the authors of the legislation mistakenly deleted the provision allowing any and all catch-up contributions for savers at every income level. As written and enacted into law, this error meant the end of catch-up contributions entirely after 2023. Congress had acknowledged the oversight, but has yet to pass correcting legislation to restore catch-ups.

Then the IRS stepped in. The agency essentially indicated it wasn’t waiting for a legislative fix. Instead, it will act as though the glitch never happened. In short, as far as the IRS is concerned, catch-up contributions can continue as before in 2024 and beyond, no matter what the language of the law says.

“The notice also clarifies that the SECURE 2.0 Act does not prohibit plans from permitting catch-up contributions, so plan participants who are age 50 and over can still make catch-up contributions after 2023,” the IRS stated in its announcement.

How This Impacts Retirement Savers

The accidental removal of catch-up contributions could have had significant implications for anyone over 50 and nearing retirement. Catch-up contributions allow people 50 and over to make extra 401(k) contributions above the regular annual limits, turbocharging savings in the crucial years before retirement. This could have left some retirement nest eggs short of the amount needed for a comfortable and secure retirement.

The burden posed by the Roth requirement for catch-up contributions for higher earners loomed somewhat less large. This change would have forced savers to immediately pay taxes on catch-up contributions rather than putting the funds away pre-tax.

Roth accounts generally provide the potential for significantly greater returns on retirement investments. That’s because withdrawals are free of income taxes. However, when savers can’t defer taxes on contributions, it can increase taxable income in the here and now. Worst case, this can push them into a higher marginal tax bracket.

Employers faced a more significant and certain burden as well. That’s because employer-sponsored retirement plans without Roth plans would have had only months to add them to accommodate catch-ups for employees earning at least $145,000. Their loud complaints about this nuisance provided a strong impetus for the IRS to act by creating this transition period.

Bottom Line

Thanks to IRS transitional relief, retirement savers have more flexibility with their catch-up contributions until 2026. They can also breathe easier thanks to the agency’s announcement that it will essentially disregard an error in the SECURE Act 2.0 of 2022 that would have eliminated all catch-up contributions altogether starting in 2024.

Here are some ways you may be able to take advantage this change:

If you’re 50 or older, take advantage of two more years of pre-tax catch-up contributions to lower your taxable income before the Roth rule kicks in.
If you can afford it, use the delay to direct some catch-up dollars to a Roth voluntarily to hedge your bets.
Develop a plan for 2026 and beyond when catch-ups must be done on a Roth basis.
Speak with a financial advisor about how to account for this in your retirement plan.

Title: Good News for People Who Make $145K: IRS Delays New Catch-Up Contribution Rule Until 2026
Author: Mark Henricks
Source: https://finance.yahoo.com/news/good-news-people-145k-irs-113000464.html
Copyright © 2023 Yahoo. All rights reserved.

Stuffed Mushrooms

INGREDIENTS:

1 1/2 lb. baby mushrooms
2 tbsp. butter
2 cloves garlic, minced
1/4 c. breadcrumbs
Kosher salt
Freshly ground black pepper
1/4 c. freshly grated Parmesan, plus more for topping
4 oz. cream cheese, softened
2 tbsp. freshly chopped parsley, plus more for garnish
1 tbsp. freshly chopped thyme

INSTRUCTIONS:

Preheat oven to 400°. Grease a baking sheet with cooking spray. Remove stems from mushrooms and roughly chop stems. Place mushroom caps on baking sheet.
In a medium skillet over medium heat, melt butter. Add chopped mushroom stems and cook until most of the moisture is out, 5 minutes. Add garlic and cook until fragrant, 1 minute then add breadcrumbs and let toast slightly, 3 minutes. Season with salt and pepper. Remove from heat and let cool slightly.
In a large bowl mix together mushroom stem mixture, Parmesan, cream cheese, parsley, and thyme. Season with salt and pepper. Fill mushroom caps with filling and sprinkle with more Parmesan.
Bake until mushrooms are soft and the tops are golden, 20 minutes.
Garnish with parsley to serve.

Sources: Sources: https://www.delish.com/cooking/recipe-ideas/a20089643/easy-stuffed-mushroom-recipe/; Produceforkids.com

Sources: https://www.delish.com/cooking/recipe-ideas/a20089643/easy-stuffed-mushroom-recipe/; Produceforkids.com

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.