After a challenging 2022, many advisors and investors began to question their traditional retirement approach to investing. Tony Davidow, Senior Alternative Investment Strategist with Franklin Templeton Institute, illustrates the potential impact of adding alternative investments to pursue growth and income—as well as seek to dampen volatility—during the accumulation and distribution phases of retirement.
In 2022, stocks and bonds were both down double-digits for the year. According to Callan Associates, there have been only two other years since 1926 when both stocks and bonds have been negative—1931 and 1969.1 Rising interest rates, record inflation, increased volatility, and double-digit negative returns for both stocks and bonds during 2022 left many advisors and investors wondering if they need to reconsider their retirement portfolios.
We should be careful to separate the potential benefits of diversification and the 60/40 portfolio as a proxy. Unfortunately, as we experienced in 2022, there are periods of time when traditional investments are highly correlated to one another.
The roles and use of alternative investments
Pension plans have historically made significant allocations to alternative investments because of the various roles that they can play: pursuing growth and income, portfolio diversification, and inflation hedging. However, up until recently, many of these investments were limited to institutions and family offices. Now through product innovation, these investments are more accessible to a broader group of investors, with more flexible features.
Overall, in our view, retirement plans should be modernized to reflect the broader set of tools available to pursue client goals. We believe advisors and investors should rethink their retirement strategies to respond to the changing market environment, the new products at their disposal, and the fact that many retirees are living longer, more productive lives through their retirement years. Alternative investments can play multiple roles in retirement portfolios, which include generating potential growth and income, seeking to dampen volatility, and/or helping to hedge the impact of inflation.
We believe advisors and investors should develop different approaches for the accumulation and decumulation phases of retirement, and should periodically revisit retirement plans to ensure they are on target for their objectives. If used appropriately, alternative investments may improve the likelihood of achieving the various goals through retirement planning phases.
To learn more, please visit Alternatives by Franklin Templeton.
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.
Investments in alternative investment strategies are complex and speculative investments, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative investments may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. An investment strategy focused primarily on privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed, or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions, and analyses are rendered as of the publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region, or market. There is no assurance that any prediction, projection, or forecast on the economy, stock market, bond market, or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not an indicator or a guarantee of future results. All investments involve risks, including possible loss of principal.
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1. Source: Kloepfer, J. “Unprecedented Territory—and the Inherent Limits of Diversification,” Callan, May 13, 2022.
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