The simple, easy-to-comprehend 60/40 retirement portfolio strategy promises to keep things simple for long-term investors. But is it a good option for retirees?
“This allocation is considered a starting point, and some investors may adjust the percentages based on their individual goals, risk tolerance and market conditions,” said Doug Carey, a chartered financial analyst at WealthTrace in Zionsville, Indiana, in a message.
The 60/40 portfolio model is designed for beginning investors, although it’s usually managed by seasoned money managers.
“A 60/40 portfolio is an investment portfolio made up of 60% equity (stocks) and 40% fixed income (bonds),” said Carla Adams, founder and advisor at Ametrine Wealth in Lake Orion, Michigan, in a message. “While there is no official definition of what makes up the equity and fixed income buckets, it is typically assumed that a 60/40 portfolio is highly diversified, as opposed to being made up of just a handful of individual stocks and bonds.”
What’s the attraction of a 60/40 portfolio and what are the downside risks? Here’s a closer look at the underlying strategy and whether it’s a good plan for retirement investors.
— How a 60/40 portfolio works.
— Diversify within categories.
— Manage the portfolio to beat inflation.
— Is 60/40 still a good idea for retirees?
— What are the alternatives for retirees?
— Good questions to ask.
[Read: How to Invest $100K for Retirement]
How a 60/40 Portfolio Works
The good news is that setting up a 60/40 investment portfolio is fairly straightforward.
“Think of it as having a classic recipe in the world of retirement investments,” said Shawn Carpenter, principal at Center Mark Capital in Chicago, in an email. “You put 60% of your money into stocks (think growth and energy) and the remaining 40% into bonds (the steady, reliable part of your investment meal). This mix has existed for ages, giving you both worlds: growth potential from stocks and some peace of mind with bonds.”
To get going, Carpenter recommends this four-step process, focusing on thoroughness along the way.
— Measure your risk tolerance. First, check your risk appetite and what you aim to achieve with your investments. Then it’s time to pick your ingredients.
— For the 60% in stocks. “Look into a mix of individual stocks, mutual funds or (exchange-traded funds),” Carpenter said. “Think about spreading your bets across different industries and regions.”
— For the 40% in bonds. Consider government, corporate or municipal bonds or bond funds. “Mixing different types of bonds helps keep things balanced,” Carpenter noted.
— Rebalance at least once a year. “Remember that markets move and groove, so you’ll need to rebalance your portfolio to keep that 60/40 ratio occasionally,” he added.
Diversify Within Categories
In building a 60/40 portfolio, it’s OK to be flexible and spread the cash around.
“Select a mix of stocks or stock funds for the equity portion of your portfolio,” Carey advised. “You can choose individual stocks or use ETFs or mutual funds that provide exposure to a broad range of stocks or specific market segments.”
For the bond portion, select individual bonds or bond funds. “Bonds can include government bonds, corporate bonds, municipal bonds or other fixed-income securities,” Carey added. “Bond funds offer diversification within the bond asset class.”
Calculating your cash allocation is as easy as it sounds.
“Calculate the percentage allocation for stocks and bonds based on your target 60/40 ratio,” Carey said. “For example, if you have $100,000 to invest, allocate $60,000 (60%) to stocks and $40,000 (40%) to bonds.”
Manage the Portfolio to Beat Inflation
One key to a successful 60/40 portfolio is to regularly rebalance (about four times a year) to make sure your portfolio stays close to the 60% equity and 40% fixed-income targets.
“If we can expect a 6% to 8% average annual return and inflation to average 2% to 3% per year, then a 60/40 portfolio will likely grow faster than inflation,” Adams said. “While inflation has certainly been higher than 2% to 3% in recent years, it’s not expected to continue for the long run and will most likely revert to its historical average rate of 2% to 3%.”
It’s also a good idea to resist trying to predict or time the stock market — no matter how the market is doing. A 60/40 plan will keep you disciplined and thinking about the long term, not reacting to short-term market swings.
“The key in choosing the right portfolio comes down to desired return rate and the amount of risk you are willing to take,” Adams added. “When clients talk to me about changing their mix and what they think is going to happen in the market, I stop them and refocus the conversation on unique situations and needs.”
“Trying to time the market is a fool’s errand, and I’ve seen a lot of wealth lost due to people thinking they can time the market and being wrong,” she noted.
[Related:How to Invest Money Wisely in Retirement to Fight Inflation]
Is the 60/40 Retirement Strategy Still a Good Idea for Retirees?
Investment advisory professionals say the 60/40 portfolio management tool still has a place in a retirement saver’s plan of attack — but it’s not a cornerstone.
“The 60/40 is a great starting point and a helpful benchmark,” said Glen Goland, senior wealth strategist at Arnerich Massena in Portland, Oregon, in a message.
Most of Goland’s clients start investing more aggressively in their early working years while they are saving for retirement. Just before and immediately after they call it quits, Goland steers them into 60/40 allocation for the first few years of retirement. “Once the first few years of retirement have passed, we gradually start adding more equity back into the portfolio,” he noted.
That last move is key since people are generally living longer.
“When I started in the industry, it was common practice to gradually reduce equity exposure in a straight-line fashion,” Goland said. “But now advisors are more comfortable adding equity for clients in their 70s and 80s because of the research that has been done around sequence of returns risk. The appropriate allocation depends on each investor’s experience, risk tolerance, cash flow, expenses and estate plan.”
What Are the Alternatives to 60/40 Plans for Retirees?
Should retirement seekers keep the 60/40 portfolio, or is it preferable to switch to another portfolio strategy? According to some money managers, it depends.
“A 60/40 allocation is appropriate for many investors at some point in their lives,” Goland said. “An alternative is to adopt a more flexible strategy where your allocation weightings change over time depending on your time horizon, cash flow needs and risk tolerance.”
Some wealth managers say looking for alternatives misses the point. They want investors to stop overthinking the issue.
“For most retirees, the 60/40 asset allocation mix represents a balance between the need for long-term return and meaningful protection from short-term market volatility risks,” said Peter Sullivan, a vice president and CFA at Segal Marco Advisors in Boston, in a message. “It offers prudent levels of portfolio diversification, can address the global investible market opportunity with ease and can be implemented cheaply and efficiently.”
“One is hard-pressed to find a better alternative solution that meets the needs of a broader set of investors and retirees,” Sullivan added.
[Related:What Millionaires Know About Retirement That You Don’t]
Good Questions to Ask Your Money Manager About 60/40 Portfolios
If you’re still on the fence about a 60/40 portfolio, contact a trusted financial advisor and start talking about 60/40 strategies. Ask and get sensible answers to these questions, Goland advised.
— What steps can be taken to maximize tax efficiency when implementing the 60/40 mix?
— What are the fees associated with the investments being recommended?
— Under what circumstances would the advisor recommend moving away from 60/40?
— Will the advisor be recommending hedged strategies and, if so, where do they fit in the 60/40 mix?
The takeaway? A 60/40 investment portfolio generally can play a decisive role in a retirement saver’s long-term investment plan, but adjust it periodically as the situation warrants.
“The 60/40 portfolio allocation does still offer valuable diversification, but because bond yields are somewhat low right now, those returns are not exactly robust,” said Hanna Horvath, a New York City-based certified financial planner, in an email. “Depending on your needs, goals and situations, you may want to tweak your allocation to 70/30 or 80/20 stock/bond mix to prioritize higher returning assets.”
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Is a 60/40 Portfolio Appropriate for Retirees? originally appeared on usnews.com
