Why Retirees May Want to Favor 5% Bond Returns Over Risky Stock Bets

Wall Street loves buzzwords. At their best, these labels help investors recognize their own habits and maybe sidestep costly mistakes. If you are feeling too much FOMO, it may be time to take a hard look at your asset allocation.

But buzzwords can also make people complacent, and sometimes overly confident.

Take the much-hyped “Magnificent Seven,” for example. Not long ago, those stocks were everywhere. As this chart shows, an ETF tracking that group has only recently edged above the total return of T-bills over the same period.

Financial catchphrases can be harmless, but they can also mislead. So here is one of my own: WASP, or Wildly Aggressive Stock Portfolio.

What Is a WASP?

The best time to identify one is not after a big winner has given back its gains and then some. When I worked as an investment adviser, I often talked with clients about what the industry calls “risk tolerance.”

It sounds sensible enough. In hindsight, though, many investors who claimed to be high on the risk scale discovered otherwise when the financial crisis hit. What had seemed like a 7 out of 10 often turned out to be a 3 or 4.

The trouble with the term is that in the advisory world it is often defined in a simple way that satisfies compliance requirements, but does little to help either clients or advisers make better decisions.

Why “De-Risking” Should Not Be a Novel Idea

With market leaders looking more vulnerable and the U.S. midterm elections approaching, another favorite phrase has been making the rounds: “de-risking.” When I hear it on financial TV, I cannot help thinking that risk should be managed at all times, not only when the headlines get scary.

I would argue for less risk-taking as a long-term approach. Outside of an easy-money environment, stronger long-term results usually come not from taking on more risk, but from avoiding huge drawdowns that erase a third or even half of a portfolio during each market cycle.

That is the reality of the Wildly Aggressive Stock Portfolio.

How a WASP Takes Shape

A WASP is not simply owning one or two growth stocks. It is what happens when investors, especially those near or already in retirement, build an equity-heavy portfolio with high beta and extreme exposure without fully realizing it.

Many people with this kind of portfolio do not think of themselves as reckless. They believe they are just investing for growth. They may hold the S&P 500 Index ($SPX), the Invesco QQQ ETF (QQQ), a semiconductor fund, and several favorite mega-cap tech names, assuming their size and profitability make the risk manageable.

They do not. Portfolios dominated by expensive, momentum-driven stocks are priced for near perfection. When sentiment changes, business spending slows, or interest rates stay elevated, those holdings do not decline gently. They can fall quickly, and by double digits.

For a 28-year-old with decades of earning power ahead, that kind of portfolio can be reasonable. A 20% or 30% decline is painful, but ongoing paycheck contributions allow more shares to be bought at lower prices.

For someone who is 58, 62, or 70, it is a different story. Once retirement withdrawals begin, even a 15% or 20% decline can be devastating. There is less time to recover, and no salary stream to keep buying the dip. Selling stocks during a downturn to cover living expenses can lock in permanent losses.

That is why I still believe bond yields around 5% deserve serious attention in many portfolios. I am increasingly unconvinced that the S&P 500 will match that return over the next five to 10 years.

And even if it does, it would need to beat 5% by several percentage points a year to justify the risk investors are taking, given current valuations and the increasingly binary way AI-related stock investing seems to be playing out.

The point is simple: risk management should be a practice, not just a slogan. Do not let the WASP sting you.

Rob Isbitts is a semi-retired CIO, former fiduciary investment adviser, Barchart columnist, and straight-talker. Download his new free e-book on hedged bond investing for retirement at ETFYourself.com. His research and model portfolios are at ROAR.PiTrade.com.

At the time of publication, Rob Isbitts did not hold, either directly or indirectly, positions in any of the securities mentioned in this article. All information and data in this article is provided for informational purposes only. For more information, please see the Barchart Disclosure Policy.