Allocate to Bonds for the Next 10 Years

Michael LebowitzAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

My recent article, The End of an Era for Stocks, warned that a tremendous 30-year tailwind for corporate earnings is dying. Consistent declines in corporate interest and tax rates significantly boosted stock prices and valuations. But with effective corporate interest rates near record lows and tax rates at their lowest levels ever, further reductions are improbable. Barring negative interest rates or reductions in corporate taxes, earnings growth rates in aggregate may shrink 30-50% over the coming decade.

The article’s advice is something all investors should appreciate, not just short-term portfolio managers.

Regarding long-term strategic thinking, it’s worth considering another critical factor for equity investors. There is an alternative. Investors can now lock in a long-term risk-free return of 4% or slightly more.

The question of how much to allocate to stocks versus bonds or other assets should be based on shorter-term fundamental and technical analysis. But for those inclined to set their investment strategies on long-term factors, such as many retirement account investors, the next 10 years may be vastly different than what we are accustomed to.

For those in the set-it-and-forget camp, I explain why the combination of bonds with higher yields and my longer-term earnings growth warnings present an excellent time to reconfigure your stock/bond allocations.