Is the 60/40 Portfolio Dead?


Today we’re discussing an important question that has been circulating in the media: Is the 60/40 portfolio dead?

Let’s unpack this question and paint a clearer picture than what you may have read and seen online.


The 60/40 portfolio


A 60/40 retirement portfolio is 60% stocks and 40% bonds. Stocks provide exposure for growth but pose a higher risk, while bonds provide exposure to income and possibly a lower degree of risk. For years, investors have been guided towards this ratio by default, regardless of their age, goals, or the length of time before retirement. To not consider someone’s individual situation is a problem, and also ignores the rule of 100.


The rule of 100


Years ago, advisors realized that as people got older and closer to retirement, it was more important to reduce risk. The rule of 100 is taking your age and using that number as your percentage of safe assets. If you are 50 years old, you would ideally have 50% safe assets to match. So, a 60/40 portfolio might work well for a 40-year-old using a safe bond portfolio with a “moderate” 60% at risk. But this may not work as well for a 70-year-old.


Many people end up in this 60/40 stocks-to-bonds allocation because when advisors are assessing their client's risk, most clients consider themselves “moderate”. It's also considered somewhat diversified because the “prevailing wisdom” is that stocks and bonds don't usually decrease together.


Facing Reality


Between 1926 and 2021, the annualized return of stocks was around 8.8%. But you aren’t going to have a retirement that long. The reality is that your 20 to 30 year retirement might fit into a period where your returns would be much lower, and your experience much more volatile.


This year, investors have been reminded of the problems with the 60/40 portfolio. It is in fact possible for both stocks and bonds to decrease at the same time in the same year. We saw this in the crash from 2008-2009 when 14 out of 16 asset classes were all down simultaneously. You think we’d learn from this. But as someone has wisely said, what we learned from history is we don't learn from history.


We saw the same trend again this year because of the government spending policy. This “free money” led to runaway inflation and action from the government to cool the economy. That meant increasing the cost of borrowing by increasing rates. The bonds that people use in their bond portfolio are longer term and considered safe and secure compared to short term. However, those are especially at risk when rates rise. The bonds they hold in their portfolio now become worth less than the new bonds that are issued with higher rates. Long-term bond portfolios dropped as much as 25% this year, showing that bonds can be just as volatile as stocks. And with impeccable timing, economic headwinds, the war in Ukraine, and bad government policy, stocks took a hard hit. This has similar downtime and downside returns, and we don't yet know where the bottom will be for both of these asset classes.


The government's long-term policy of keeping rates low in the past has affected bond owners by negatively impacting their returns: dramatic losses when rates increase and low yields on their bonds.


Catch 22


Investors try to pivot by getting rid of all bonds and putting their money in stocks because they feel that low rates in the past unfairly kept their growth low. This is true. And some advisors have been encouraging this shift to a higher percentage of at-risk assets. However, we are now seeing new client portfolios that have extraordinarily high risk relative to the goals they are trying to achieve.


Pre-retirees and retirees are especially vulnerable and run the risk of delaying retirement. During the crash of ’08-’09, people waited for the stock market to recover before retiring, but this didn’t happen until 2013. Several people didn’t have the right kind of plan in place and returned to work, ending their retirement.


The plan


If you are retired or within 10 years of doing so, you need to develop a portfolio that includes safety. Find bond income alternatives; the risks and historically low rates are making them less attractive. There is a better route for those who still want growth, but aren't interested in a high-risk portfolio. In the following segment, we will discuss alternatives to bonds for safety and income.


Don’t pack your portfolio with the wrong tools and run out of money before you run out of life. The tools we use at Lord and Richards help you assess your level of risk much more specifically and develop a written plan for retirement. We’ll help you establish financial independence so that you can take the amazing resources God has provided and do wonderful things for Him.


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