Wall Street is buzzing with a new term: “market melt up.” Many people are hearing about record highs and wondering what this means for their retirement. Investopedia defines a melt up as “rising stock prices driven by investors following the opinions of others, rather than fundamentals.” It sounds like an exciting time for investors.
Recently, portfolio manager Scott Zelnick shared with Fox Business that “this melt up is far from over.” He pointed to several factors: the ongoing technology and AI revolution, the current era of “don’t fight the Fed,” and a “roaring 20s setup” with deregulation, lower taxes, and improved productivity. He even noted that since 1980, the market has been higher a year later in all 20 instances where the Fed cut rates within 2% of all-time highs.
Could a “Melt Up” Lead to a “Meltdown”?
The real question for most of us is whether this market melt up could lead to a market meltdown. The truth is, the market constantly cycles. We have seen firsthand how easy it is to get lulled into complacency when account balances rise. Some wonder if this growth is purely artificial, perhaps fueled by the massive increase in the money supply over the last decade. Trillions of dollars have entered the system, flowing into real estate and the stock market. Of course, the market hits all-time highs when the money supply does too.
This isn’t just a 30-second sound bite. It’s a complex reality. While a market correction is a normal part of the cycle, an unexpected downturn can feel like a “meltdown” if you are unprepared.
The Power of a Durable Portfolio
We believe strongly in building durable portfolios. What does this mean? It means constructing a portfolio that allows you to stick to your plan through all market conditions—ups, downs, and everything in between. Performance is crucial, and we are proud of the portfolios we build for our clients. However, our primary focus isn’t just chasing “sexy returns.”
Our goal is to create a portfolio you can trust. A durable portfolio means you won’t panic when the market fluctuates. If you can stay the course, you are primed to benefit when others might be “freaking out” and making emotional decisions. Those quick reactions often line the pockets of those who remained steadfast.
Understanding Portfolio Polarity
How do we build such a resilient portfolio? Our approach involves what we call polarity. This means your portfolio isn’t designed to have one type of investment trying to do everything well. Instead, we create a balance:
- Growth Dollars: These are designed to be volatile and grow aggressively with the market.
- Protection Dollars: These assets are less subject to market swings. Their goal is stability, doing what they need to do regardless of market conditions.
During a melt up, your growth money performs well, participating fully in the market’s ascent. However, if a meltdown occurs, your protection dollars ensure not all your money is riding that same wave. This strategic balance is key to a truly durable portfolio.
Avoiding Hidden Portfolio Landmines
Many people believe they have a durable portfolio because they see a long list of ticker symbols or various funds in their statements. They might think they are diversified. However, we often uncover hidden “landmines” within these portfolios.
Consider the “Magnificent Seven” stocks. These seven stocks have accounted for a significant portion of the S 500’s recent growth. It is very possible to have multiple mutual funds in your portfolio, and many of them own these same seven stocks. This creates an unintended overweighting:
- You might own 15 different mutual funds.
- 10 of those funds could own the same Magnificent Seven stocks repeatedly.
This creates an illusion of diversification. When markets are good, you see positive returns and assume your portfolio is robust. However, if these concentrated holdings face a significant downturn, you could experience much larger losses than anticipated.
The Dangers of Portfolio Drift
Another common issue we address is portfolio drift. Imagine you start with a traditional 60/40 portfolio—60% equities (stocks) and 40% non-equities (bonds, money markets). If you simply “let it ride” without adjustments, your equity portion is likely to grow faster than your bond portion.
- Over time, your 60/40 portfolio could easily drift to a 70/30 or even 80/20 allocation.
- This means you unintentionally take on more risk than you initially planned.
We’ve seen clients whose portfolios have drifted so far out of alignment that they were shocked by their actual risk exposure. If you cannot confidently explain the makeup of your portfolio and why it aligns with your future goals, it’s time for a review.
Rethinking Your “Less Risky” Allocations: Bonds vs. Annuities
For many preparing for retirement, a significant portion of their portfolio is allocated to “less risky” investments, typically bonds. We regularly review portfolios where bonds make up a large contingent.
The performance of many traditional bond funds has often been modest, with returns struggling to keep pace with inflation over various 10-year periods. For instance, many widely used bond funds have historically offered average annual returns in the low single digits. These returns are often less than the inflation rate, meaning your money is losing purchasing power over time, even with potential market risk.
We often compare these bond allocations to other options, like a fixed index annuity with no explicit annual management fees that tracks the S. This type of annuity can offer a 0% floor (no downside market risk) while capturing a significant portion of the S’s upside performance. For instance, an annuity with a 10.25% cap showed a 10-year return of 7.31% in a recent client example, compared to 1.87% for their bond fund.
Clients are often initially hesitant about annuities. However, when we lay out the black-and-white facts—comparing their bond fund’s actual performance against an alternative that offers growth potential with principal protection—their perspective often shifts. Our job is to provide education and present all viable options. You need to know what’s truly going on with your money.
Your Trusted Partner
We are committed to helping you build, protect, and grow income for a secure retirement. Our dedication to client success and our innovative approaches to financial planning have earned us recognition as a leader in the industry. Best Financial Planner in Woodstock, GA for 2023, 2024, and 2025. We believe in providing clear, actionable advice to empower you to make informed decisions about your financial future.
We invite you to experience our complimentary 3-Meeting Retirement Planning Process. This comprehensive approach is designed to help you understand your current financial standing, identify potential gaps, and build a tailored strategy to pursue your retirement goals.
Visit us at www.vincentplanning.com or call us at 770-485-1876 to get started.
Alternatively, you can book a “Can We Help” call to speak directly with an advisor and determine if we are a mutually good fit for your retirement planning needs.
For personalized financial guidance, reach out to us today to schedule a consultation.