Is Your Portfolio Balanced?

By Happyphotons @ Adobe Stock

Do you remember when certain people were calling the balanced portfolio “dead” a while back? It’s only taken a short time for things to turn around. The equity risk premium has turned negative, meaning the 10-year Treasury yield is higher than the earnings yield on the S&P 500. That’s no reason to abandon the stock market, but it’s a good reminder to talk to your advisor about a balanced portfolio that includes bonds. The Wall Street Journal’s Hannah Erin Lang reports:

Stocks haven’t looked this unattractive, by at least one measure, since the aftermath of the dot-com era. Plenty of investors are piling in anyway.

The equity risk premium, often defined as the gap between the S&P 500’s earnings yield and that of 10-year Treasurys, turned negative in late December for the first time since 2002 and sat last week at negative 0.15 percentage point.

The metric is based on a calculation of how much stocks yield, which is derived by dividing the stock market’s expected earnings by its price. The earnings yield is then compared with the yield on government debt.

The difference between stock and bond earnings yields shows how much investors are compensated for the additional risk of owning stocks over relatively risk-free government bonds. Over the long term, stocks need to promise a higher reward than bonds. If not, the safety of Treasurys would outweigh the risks of stocks losing some, if not all, of investors’ money.

In recent weeks, a combination of higher Treasury yields and soaring equity valuations pushed the equity risk premium into the red. That could pose a threat to the recently rekindled stock rally.

Action Line: When you want to talk about a balanced portfolio, email me at ejsmith@yoursurvivalguy.com. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.