In 2020, we ran a $3.7 Trillion deficit. That’s Trillion, with a capital T. Also in 2020, the inflation rate was estimated to be 0.62%. The current 10-year Treasury Note yield is 1.117%.

What will happen in the decades to come is anyone’s guess. Will we end up with negative rates as so many countries have or will interest rates rise? Will inflation stay ultra-low or begin to creep up?

Here’s what we do know. Given the ultra-low inflation rates and historically-low bond yields, creating a retirement income plan by overweighting your portfolio to fixed-income doesn’t seem like a very good bet to me. We must ask ourselves, what are we asking our portfolio to do for us? Let’s explore…

As we have probably come to the end of an almost 40-year bond bull market, it seems likely that a bond bear market may ensue. Regardless of whether that is true or not, if you over-weight your retirement portfolio in fixed-income, you are asking it to produce a 30-year income from a point of record-low yields just as we have printed more money in the history of our country which ‘may’ increase our overall inflation rate. Is that the bet you want to make?

Comparing that to equities, what are we asking the Great Companies of America and the World to do? I’d say, we’re simply asking them to do what they’ve always done. Even if equities perform at a rate below that of their historical average, it seems at least likely that they will at least exceed that of the bond-market by a comfortable margin given the circumstances. Of course, that may not be true in the short-term where everything is completely unknowable, but in the long-run, that seems like a reasonable bet to me.

Making equities seem that much more attractive, the dividend yield of the S&P is about 40% higher than the 10-year Treasury Note with more potential for growth coming along for the ride.

If inflation rises and interest rates rise as well, we can expect bond prices to fall. If inflation rises, the Great Companies of America and the World at least have an Ace up their sleeves - they can raise prices. They can also raise dividends as well as they have roughly outpaced inflation by about 2X over the last 60 years or so. If inflation were to tick up, which asset would you prefer to own? One that needs to do something it’s never done before, or one that just needs to do something in the ballpark of what it has always done?

In the end, the short-term “security of principal” isn’t what matters. What matters for a multi-decade retirement is how much you have left over after inflation has taken its bite of your apple. Growing your income is what matters in the long-run. Which do you want to bet on for the next 30 years?

Stay the course,
Ashby

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This post is not advice. Please see additional disclaimers.