Perhaps no topic is more hotly debated in retirement planning circles than the viability of the 60/40 portfolio. This investing strategy, which calls for 60% of a portfolio’s assets to be invested in stocks and the remaining 40% in bonds, has been the gold standard for retirees and those approaching retirement for decades.
But a simple Google search of the term will return scores of articles and experts declaring this popular asset allocation is outdated and dead, citing the need for more equity exposure in retirement, as well as historically low interest rates that have depressed fixed income returns.
However, not everyone is ready to stick a fork in the 60/40 portfolio. Some experts recommend sticking with this balanced approach, while adding some minor tweaks to adjust for current and future challenges. A financial advisor can help you set your retirement asset allocation and determine whether a 60/40 portfolio is right for you.
A Closer Look at the 60/40 Portfolio
The appeal of the 60/40 portfolio stems from the balance and moderate risk it offers investors. As chartered financial analyst Thomas Lee wrote in a recent column for WealthManagement.com, the 60/40 strategy is “designed to give investors saving for retirement access to economic growth and income in a diversified manner.”
In fact, the asset allocation offers investors 76% of the upside returns of a portfolio that’s fully invested in equities with about 40% less volatility, according to Lee.
But a large contingent of experts and outlets argue it’s time to move on from this strategy. Current and future market conditions require a different approach.
“Today, the 60/40 framework is coming under pressure,” BlackRock, the world’s largest asset manager, wrote in one of the firm’s recent insights. “Equity markets are near all-time highs, but valuations are stretching, and security concentration is increasing. At the same time, bonds are contending with the challenges of ultra-low yields, yield-eroding inflation, and a potential rising rate cycle. The net result is an unbalanced portfolio increasingly driven by equity exposure and with potentially less diversification than before.”
But count John Rekenthaler, vice president of research for Morningstar, as one of the strategy’s defenders. He argues the portfolio remains viable, despite calls for its abandonment. Using the Vanguard Balanced Index as a proxy for the strategy, Rekenthaler noted in a recent column that the fund outpaced inflation between 2001 and 2011, but only returned 4.79% during that 10-year period, in large part due to a 32.6% drawdown during the global financial crisis.
Yet, the strategy has had a resurgence since then. The Vanguard Balanced Index returned 10.19% between July 2011 and June 2021. More recently, the strategy produced a real return of about 8%, adjusted for inflation, through the first 11 months of 2021, according to Morningstar’s Jason Kephart.
“I looked at the rolling 12-month real returns for the 60/40 since 2000,” he said in a December interview on Morningstar.com. “The median over that last 21 years is about 7.5%. So, it’s actually outperformed its median real return over that time period. So, even though all this doom and gloom came true, it didn’t derail the 60/40.”
Don’t Abandon Your 60/40 Portfolio: Improve It
Yet, even supporters of the strategy say there are tweaks you can make to your 60/40 portfolio to bolster its performance.
Lee, who serves as the chief investment officer of equities and derivatives for Parametric, suggested keeping the 60/40 split as the foundation of your portfolio and integrating alternative investments that may offer added diversification and the potential for more robust returns.
“Rather than abandoning the 60/40 allocation, investors might be better off using it as the core in a core/satellite portfolio construction,” Lee wrote. “In this structure, investors keep a significant portion of their assets in a balanced core (60/40 or something similar) and opportunistically make investments in satellites that provide an enhanced return, increased diversification, or both. Importantly, each satellite investment is considered independently to understand how it interacts with the core and other satellite investments.”
Rekenthaler says investors who consider replacing fixed income investments in their 60/40 portfolios with more stocks should “avoid the temptation.” Rather, they can think about investing in shorter-term bonds.
“Instead, maintain the same 60% equity position but consider reducing the portfolio’s bond-market risk by swapping into shorter notes or even raising cash,” he wrote. “If long Treasury yields continue to rise, as they have done since summer 2020, those monies can gradually be reinvested into longer-dated securities.”
However, he added the following caveat:
“But that is merely a gentle suggestion, and a temporary one at that,” Rekenthaler wrote. “More generally, I do not challenge the wisdom of the 60/40 portfolio. Ten years from now, I will likely be writing a follow-up column demonstrating how the strategy remains valid.”
The 60/40 portfolio has been a popular asset allocation for retirees and those approaching retirement, and for good reason. The strategy has offered just enough exposure to equities to benefit from the growth of stocks, while bonds serve as a ballast and cut down on volatility. But historically low fixed income returns and the recent bull run of stocks have many questioning whether the 60/40 portfolio is still viable.
Then again, other experts argue the strategy remains effective and should continue to be relied upon. Instead of scrapping it altogether, investors may consider making minor tweaks, like keeping the majority of their assets invested in a 60/40 portfolio and then investing a smaller portion in assets that offer larger returns or more diversification.
Tips for Retirement Savers
- We could all use some extra help when it comes to planning for retirement. A financial advisor can select investments, manage your retirement portfolio and create a financial plan for the future. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- How much money will you have saved up by the time you retire? Our retirement calculator can help you answer that question. If you’re not on track to meet your savings goals, consider contributing more to your employer-sponsored retirement plan or IRA. Increasing your contribution by just 1% can add up to big savings over time.
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