Change is constant on Wall Street — even a 24-year-old with a simple 401(k) plan knows that.
That’s especially so for registered investment advisors and brokers wedded to a traditional 60-40 equities and fixed-income portfolio strategy model. For decades, the 60-40 rule been a mainstay plank in any investor’s portfolio. By design, a 60 percent allocation to stock provides investors a clear path to stock market gains, while the 40 percent allocated in bonds can cushion any stock market downturns.
Recently though, critics are growing more adamant that the 60-40 rule is a relic that’s hurting people’s long-term savings — but what’s the case they’re trying to make?
“The 60-40 rule has been around for over 50 years and, while markets have become more complex, it is still a good starting point for investment planning,” says Robert Goldberg, clinical assistant professor at Adelphi University. “Recognize, though, that the actual allocation for any one investor may vary based on a number of factors including age, risk tolerance and near- and long-term funding needs. Furthermore, my research has shown that there are times that there is an advantage to weighting more to stocks, and times that having a greater weight to bonds is more advantageous.”
[See: 7 of the Best Stocks to Buy in 2017.]
Others point to underlying factors to consider in any current asset allocation portfolio models.
“It’s easy to say the 60-40 portfolio is dead, but of course, it’s more complicated than that,” says Andrew Wang, managing partner at Runnymede Capital Management in Mendham, New Jersey.
The larger questions, Wang says, are: Is the 30-year bull market in bonds over? How quickly will interest rates rise? And does that mean that an investor should not own any bonds?”
“Indeed, we are living in unusual times,” Wang says. “Never before had we seen central banks lower interest rates to such low levels, even negative in Japan and some European countries.”
However, Wang points out the average investor has been burned more when taking an all-or-nothing approach.
“If one expects interest rates to rise and the Federal Reserve is telling you that you should, investors should own more short-term bonds and reduce or eliminate long-term bonds,” he says.
Wang reasons that when your short-term bond matures, you’ll be able to reinvest that money into new bonds issues that pay a higher coupon.
“Long-term bonds don’t pay you enough for the risk that you are taking and will lose value when rates rise,” he says. “By laddering the bond portion of your portfolio, you can mitigate risk and benefit by normalizing interest rates. After all, higher rates mean that new bonds you buy will generate higher income, so a 60-40 portfolio could make sense once again.”
Age factors into the 60-40 equation as well, especially as Americans are living longer.
“A 60-40 portfolio doesn’t make a whole lot of sense for a 20-something investor,” says Patrick McDowell, a financial advisor with Arbor Wealth Management in Miramar Beach, Florida. “They have plenty of time for equity volatility and they are likely to be net contributors to investment (and) retirement accounts for the next 20, 30 or 40 years.”
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
But for a 70-year-old retiree, McDowell would want to have at least a quarter of his or her portfolio in fixed income investments.
“Some folks want that number much higher, in the 40 to 50 percent range,” he says. “Basically if you can’t afford to take a 40 percent equity hit, you should own some bonds simply for portfolio diversification. The average retiree is withdrawing funds from their investment accounts (and no longer contributing) and therefore keeping a stable portfolio balance matters a whole lot more.”
The 60-40 calculus may have worked when portfolio balance was underplayed by both investors and money managers. But times change, investment experts say.
“The only good that comes from the 60-40 rule today is that it’s still an improvement over 100-0 or 0-100,” says Matt Miller, a wealth advisor with Hallet Advisors in Port Angeles, Washington.
Miller says the rule was a “catchy way” to introduce the concept of asset allocation to a universe of investors who may have believed that the world was simply divided between stock investors and bond investors.
“One of the lessons learned from 2008 is that there are periods when stocks and bonds are capable of moving simultaneously in a downward direction,” he says. “This has lead the investment industry to seek for even further asset class diversification by incorporating things like cash, real estate and commodities into the mix.”
Data-wise, the anti-60-40 crowd might be on to something.
The proof really does seem to be in the pudding. Recently, BlackRock engaged with more than 1,000 financial advisors to analyze more than 1,500 portfolios in search of risk vulnerabilities. Its conclusions? “Most balanced 60-40 portfolios analyzed were riskier than a blended benchmark of the S&P 500 and the Barclays Aggregate Bond index,” Blackrock says.
In fact, 94 percent of investors have “too much risk in their portfolios” and the traditional weighting of 60 percent stocks and 40 percent bonds is “no longer appropriate given the current market environment.”
[Read: Why Investors Need to Tolerate Risk.]
Portfolio risk is timeless, financial professionals are saying, and in this market environment, the 60-40 rule may not be the best medicine to take to reduce that risk.
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