Portfolio managers who have traditionally used a 60/40 stocks-to-bonds split for clients say now is the time to consider buying more into fixed income to reverse expected economic weakness and volatility. Both asset classes have had a tough year. Bond yields have rebounded recently, and some areas of the market are showing solid returns for investors. Yields move inversely to bond prices. “Bonds are more attractive than they’ve been for a while, probably more than a decade,” said Barry Gilbert, an asset allocation strategist at LPL Financial, adding that they make more sense for investors who are more conservative or looking to offset income. in your wallet. At the same time, stocks have been volatile and are likely to continue to take a hit. This has already prompted investors to sell riskier assets in exchange for the safety of fixed income. The ratio of stocks to bonds has fallen since mid-August, Credit Suisse analyst David Sneddon wrote in a note on Monday. “This suggests that we may be seeing a more decisive turn to the downside and a more sustained downtrend as investors move further away from stocks and eventually begin to move into bonds, and the trend is expected to to the decline of the shares itself is encouraged,” he said. Which Bonds Make Sense The threat of a potential recession is spurring a move into bonds, especially as continued high inflation and Federal Reserve rate hikes weigh on stocks. “We think stocks have more room to fall, especially since earnings are at greater risk in a recessionary scenario,” said Michael Reynolds, vice president of investment strategy at Glenmede. In such an economic environment, being underweighted to market risk makes sense. It also seems sensible to turn to fixed income for some protection. Historically, bonds mitigate the risk and sharp volatility that stocks tend to see. While this year has been tough for both asset classes, that hasn’t changed that fact, according to Anthony Saglimbene, chief market strategist at Ameriprise Financial. “What has changed this year is that income looks more attractive today with yields coming back up,” he said. “When you start getting 4% for two years and almost 4% for 10 years, those are attractive returns.” The two-year US Treasury yield is currently around 4.14%, while the 10-year Treasury yield is 3.75%. Shorter duration bonds are popular with investors right now because of these higher yields. For example, one-year and three-year US bond yields are above 4%. “Right now, we’re putting our overweights in short-term fixed income,” Reynolds said. “We are also less exposed to rising interest rates.” He noted that the company’s sweet spot is in the two- to three-year range, as that’s where they’re finding the best value. Those with more bonds in their portfolios would want to lean more on the shorter end of the yield curve for maximum protection and income, according to LPL’s Gilbert. However, investors with a more traditional 60/40 split would probably want to stick to a duration of around six or seven years, he said. Of course, if there is a recession in the next few years, there will come a time when it makes sense to go even higher in bonds and look for investments further down the yield curve. “In recessionary environments, you want to have some length and if interest rates come up, you can make a big profit on those bets,” Glenmede’s Reynolds said. Now, he noted, that bet is a bit premature because interest rates are likely to be a bit higher. Other areas of fixed income Of course, investors may be wary of bonds, as they have also been hit hard this year, leading to price falls on both sides of the 60/40 portfolio. For those looking for income but don’t want to gamble too much in bonds, there are other options, according to Rob Burnette, CEO and financial adviser at Outlook Financial Center in Troy, Ohio. This includes top stocks that pay solid dividends like IBM or looking at other investments such as preferred securities or structured notes. Preferred securities are fixed income instruments that retain some of the qualities of stocks and bonds and generally offer higher yields, while structured bonds are debt issued by financial institutions. It may also make sense to have more cash on the sidelines ready to go back into stocks. “It’s good to have some dry dust on the sidelines in an environment like this, you never know what kind of opportunities will arise,” Reynolds said. It may also be a good time to buy stocks and bonds now and move back toward a 60/40 split, Gilbert said. “You should look at opportunities when it feels the worst to do so,” he said. Rebalancing could make sense for investors looking to position themselves appropriately for the coming months, they may not need to do much to realign their portfolios given the selloff in stocks so far. Still, it makes sense to regularly reassess your bond, stock, and cash balance to make sure your allocation meets your goals. Many investors may find that even if they haven’t seen big gains this year, they’re still set up for long-term success and shouldn’t make any emotionally driven changes. “A well-diversified portfolio remains the best path for investors,” Saglimbene said.