It’s a classic dilemma in investing and life: Stick with something tried-and-true — or try something new that could be even better?
That’s what some financial advisors and investors are wrestling with, regarding the standard portfolio known as “60/40”. For years it was a go-to for investment assets: 60% equities, 40% fixed income. A diversified basket of stocks gives you growth potential, and the bonds give you safety and ballast.
Think of it as the family minivan: Not very sexy, but sturdy and reliable, something to get you from Point A to Point B.
“It was a basic starting point, whenever you were suggesting a portfolio to somebody,” says Wade Pfau, professor of retirement income at the American College of Financial Services. “It was a good default. The idea was to strike that balance between risk and return.”
These days, though, you don’t hear as much about this old financial rule of thumb. In fact some market observers have called the idea “no longer good enough,” “leading investors over a cliff,” or even “dead” altogether.
“Does everybody wear a size-10 shoe?” asks Artie Green, a financial planner with Cognizant Wealth Advisors in Los Altos, California, “If not, why would everybody use a 60/40 allocation for growing their savings? I don’t know when 60/40 became so popularized, but no allocation model should be considered right for everyone.”
That lack of customization is one main knock against the 60/40 portfolio. But there are others, too: That a classic stock-bond split is a little too simplified in today’s investing world, where there are many additional asset classes to broaden your diversification. There are also plenty of bond worries in the current economy, which means the supposedly conservative portion of the 60/40 portfolio might not be as safe as you think.
“I think the 60/40 portfolio is antiquated,” says Keith Singer of Singer Wealth Advisors in Boca Raton, Florida. “When bonds used to pay 6-8% and interest rates were falling, the 60/40 model worked great. But as they say, past performance is no guarantee of future results, and that is especially true with the 60/40 portfolio.
“The 40% which is supposed to reduce risk is now fraught with interest-rate risk, and if interest rates rise, the bonds will go down in value. Why take that risk for such a small potential return?”
How the 60/40 portfolio has performed
All that being said, the 60/40 portfolio has certainly performed quite well over long periods of time. When trading research site QuantStart back-tested a 60/40 portfolio from 2003-2019, it found a compound annual growth rate of 7.1% — not much behind the performance of an all-stock portfolio, and with much less volatility.
And over a longer timespan of many decades — from 1926 to 2020, to be specific — 60/40 produced an impressive annual return of 9.1%, according to investment giant Vanguard Group.
“Rumors of its death are greatly exaggerated,” says Charles Sachs, chief investment officer with Kaufman Rossin Wealth in Miami, Florida. “More modest-sized portfolios will be served well from an old-fashioned 60/40.”
In fact when Vanguard ran the numbers for the volatile first half of 2020, it revealed the benefits of the good old 60/40. While global stocks sunk 6% over that period, a 60/40 split was only down 1.5% — no doubt helping investors stay in the market, which is the point of a balanced portfolio in the first place.
What to know about a 60/40 investment portfolio
But with larger and more complex portfolios, and when compared to more sophisticated investment products, 60/40 does have its limitations. A smarter strategy would be more nimble in terms of allocation, shifting percentages over time and including alternative asset classes as well.
A few things to keep in mind, as you consider the right portfolio breakdown for you:
Bond outlooks are worrisome: Having 40% of your assets in fixed income is fine during an extended bull market for bonds. But in a rising-rate environment, that math can change. Vanguard’s Long-Term Bond Index (BLV), for instance, is down over 10% in just six months.
“Bonds have a poor outlook at this point,” says Pfau. “They hardly yield anything, and if interest rates go up, you will see capital losses on bond funds. That may be a main reason why 60/40 is not being discussed as much.”
Age matters: The investment mix appropriate for a 20-year-old is not remotely the same as that of an 80-year-old. A younger investor, with so much runway still ahead of them, should typically be invested in stocks at levels higher than 60%. Meanwhile someone well into retirement should be much heavier on less-volatile bonds or cash.
That explains the growing popularity of target-date funds, which tweak those allocations automatically for you over time. According to the most recent numbers from investment giant Fidelity, 55% of 401(k) investors on their platform had all their savings in target-date funds.
Consider alternative assets: In the old days, a simple 60/40 breakdown made sense because it was much harder to invest in alternative, non-correlated assets. These days, however, there are a thousand ways for retail investors to build stakes in real estate, or commodities, or any other asset class you care to mention.
That can provide diversification beyond just bonds. Fidelity’s Freedom 2035 target-date fund, for instance, includes everything from commodities, to real-estate income, to emerging-markets equities (which didn’t have a place in most traditional 60/40 portfolios).
“The 30-year bull market we have seen in bonds likely has ended,” warns David Mullins, a financial advisor in Richlands, Virginia. “The foundation of 60/40 portfolios is to have non-correlating investments designed to keep the mountains from getting too high and the valleys too low.
“I would urge investors to consider using other asset classes to achieve similar diversification for a less bumpy ride. Commodities, gold, REITs, and international and emerging-market equities, in addition to bonds, can all play a part in helping to reduce volatility while increasing expected return.”