The 60/40 Portfolio: Still Going Strong?

pie chart apple pieLike Betty White, it may be old, but it’s still got what it takes.

The 60/40 portfolio, or the traditional portfolio mix of 60% stocks and 40% bonds, has been around for a long time. Maybe too long?

Some investment gurus say it is no longer relevant to today’s reality.

But others argue that the more things change, the more they stay the same.

“Despite the rise of alternative asset classes, the traditional mix of 60% stocks and 40% bonds is still the best asset allocation for the majority of investors,” said Fran Kinniry, a principal in Vanguard’s Investment Strategy Group.

His reasoning?

“Over the past 20 years, nothing has been a better hedge against the downside in equities than investment-grade bonds.”

Many highly-touted alternative investments (e.g. alternatives to traditional stocks or bonds) lost money in the 2008 downturn, and have been unable to keep up with the performance of more traditional investments since the markets began their recovery.

Does that mean every investor should have a 60%/40% portfolio? 

Of course not.  Each investor has a unique profile, resulting from their risk tolerance, financial goals and time horizon. Some investors will want a more conservative mix, while others are comfortable with a more aggressive (stock-oriented) portfolio.

And in all fairness, many investment advisors, like our firm, have “modernized” the 60%/40% portfolio by including more alternative and non-traditional investments, while still keeping the rough outlines of the overall stock/bond mix.

But the important message, especially as we read articles almost daily about the “bond bubble” and the so-called “Great Rotation” into stocks, is that bonds or similar low-volatility investments deserve a place in almost every investor’s portfolio.

Here’s the rationale, nicely summed up by financial writer Anne Kates Smith at Kiplinger Personal Finance:

“Over time, a diversified portfolio provides the best combination of  reasonable returns with bearable volatility.  Researchers at fund company T. Rowe  Price compared the returns of portfolios that varied from 100% in bonds to 100%  in stocks …. From 1985 through 2012, a portfolio of 60% stocks, 30% bonds and 10%  cash would have returned 9.8% annualized — about 93% of the return of an all-stock portfolio, but with just 62% of the risk.

 And that, my friends, is what it is all about.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

No comments yet.

Leave a Reply