The American "baby boomer" generation: enjoyed the "stock market bull market" in their youth, but encountered "high bond interest rates" in retirement.

The baby boomer generation in the United States is currently experiencing the best investment opportunity since 2003.

The baby boomer generation refers to Americans born between the end of World War II in 1946 and 1964, with a population of 76 million, accounting for one-third of the US population at that time.

As the generation with the highest birth rate in US history, the baby boomer generation has been the backbone of the US economy in recent decades and has also accumulated considerable wealth. Currently, most of them are between the ages of 59 and 77, either retired or approaching retirement age.

It is worth noting that when it comes to the investment luck of the baby boomer generation, fate seems to always be on their side.

The stock market bull market since 1982 coincided with the golden working period of the baby boomer generation, allowing them to accumulate a large amount of savings over the past few decades.

Recently, the rising US bond yields have opened the door for these retired investors who are starting to dislike risks to allocate bonds.

As Joe Davis, Global Chief Economist of Vanguard Group, said, "The recent surge in interest rates has pushed bond yields to the highest level in nearly 15 years, which is the best economic and financial development opportunity for retirees in 20 years."

The baby boomer generation is shifting towards US bonds

Given that the current yield on 10-year US Treasury bonds is 4.23%, the baby boomer generation has reason to move their funds into more conservative investment areas. In addition, Generation X, aged between 43 and 58, is also paying attention to the US bond market.

Considering the increasing risks of holding stocks, the baby boomer generation is reducing their stock positions.

Last year, among Vanguard 401(k) investors aged 55 and above who actively manage their own funds, 45% of investors had more than 70% of their investment portfolios in stocks. In 2021, the percentage of investors holding this proportion of stocks was 47%.

According to a fund tracking company, investors have withdrawn a total of $98 billion from stock funds and invested $170 billion into Morningstar's fixed-income funds as of October 31 this year.

Are stocks losing their appeal?

According to Morningstar's data, since 1926, the average annual inflation-adjusted return of large US company stocks is 7.1%, while the average annual return of US intermediate-term government bonds is 1.8%.

Considering the high return of stocks, young people usually hold a large amount of stock positions in their investment portfolios. However, as they reach middle age, the risk becomes difficult to bear, so high-risk stocks are no longer the preferred choice, and bonds are favored for their stable returns.

Financial advisor Brendan Mullooly said, "The more money investors make from bonds, the less stocks they need to hold to achieve their retirement goals." Mullooly said that when the US bond yield is 2%, someone who holds 40% bonds and requires a 5% overall return must achieve at least a 7% return from stocks. However, the return rate of the S&P 500 index is only about 1.6%.

But as the US bond yield surpasses 4%, like it is now, the same person, even if they hold less than 60% stocks, still has a high chance of earning a 5% return from their investment portfolio.

Currently, bonds seem to be the better choice. David Blanchett, the head of retirement research at PGIM, the asset management department of Prudential Financial Group, said, "If you want income, I suggest you choose fixed income."

Davis said that short-term US bond yields are at higher levels, which means that some investors scoff at long-term bonds with yields higher than 4%.

Rob Williams, the managing director of financial planning at Charles Schwab, said that if the Federal Reserve cuts interest rates in 2024 as many people expect, the rates of newly issued certificates of deposit, money market funds, and short-term government bonds may decrease, so long-term products should be considered.

Williams recommends that investors purchase 1-7 year US bonds to lock in the current yield.

Stephanie Link, the chief investment strategist at Hightower Advisors, is more optimistic about investment-grade corporate bonds with maturities of 3-12 years and yields of about 5.5%, or funds invested in such bonds.

Is the traditional 60/40 investment ratio still relevant?

In general, an ideal investment portfolio should not be limited to stocks and should also include a certain proportion of bonds depending on the situation.

Based on calculations, a person with $1 million who fully invests in 10-year US bonds with a yield of 4.23% would have an annual income of $42,300. However, after paying federal taxes on this income, an investor in the 22% tax bracket would only keep $32,994.

Paul Auslander, a financial planner at Clarity Wealth Management, said that in addition, most retirees need some stocks to ensure that their savings grow over time. He suggests that many elderly investors allocate their investments in a 60/40 ratio (60% stocks and 40% bonds).

Last year, with both stock and bond prices falling, some people worried that the traditional 60/40 investment portfolio might no longer be feasible, but Auslander believes that this claim is exaggerated.

Overall, "60/40 is a good combination for the baby boomer generation," he said. "If you invest 40% of your funds in bonds, generating a return of 4% to 6%, and invest 60% of your funds in stocks, then you should achieve a decent return."