By John Benedict
Every investment portfolio comes with the disclosure that “past results do not predict future returns,” and the 60/40 portfolio should be no exception. Often regarded as the best portfolio strategy for retirees, the promise of the 60/40 investment strategy has recently been called into question.
As bond yields remain historically low and inflation reaches new highs, many experts have expressed concerns that the previous growth and stability of the 60/40 portfolio has run its course. So, what does that mean if you’re on the verge of retirement? Should you drastically alter your investment strategy? While a 60/40 portfolio may have worked in the past, it might be time to revisit your asset allocation to ensure it still makes sense for you and your retirement.
What Is the 60/40 Portfolio?
The 60/40 portfolio is a traditional investment strategy that utilizes an asset allocation of 60% stocks and 40% bonds. The logic behind this strategy is that when stock returns decline, the bond yields will increase to stabilize the portfolio and keep the overall return steady.
If you’re worried about how a 60/40 portfolio may affect your retirement plan, consider these pros and cons.
The 60/40 portfolio has long been used as a retirement investing strategy due to its ability to produce both growth and long-term income. Benefits of this strategy include:
- Consistent returns. Since 1926, the 60/40 portfolio has received an annualized rate of return of 9.1%. (1) More recent results from 1972-2021 have produced returns of 9.61%. (2)
- Consistent withdrawals. Research supports the idea that the 60/40 portfolio is the ideal asset mix for retirees. According to William Bengen CFP®, retirees can withdraw up to 4% of their investment portfolio in the first year of retirement, and 4% plus inflation for every year thereafter. (3) Based on the 4% rule, he found that the 60/40 ratio is the ideal combination of growth and income to sustain this level of consistent annual withdrawals.
- Consistent even in previous economic downturns. Michael Kitches CFP® has also conducted research that supports the 60/40 portfolio, including a historical analysis of safe withdrawal rates that will sustain a 30-year retirement. Incredibly, he’s shown that the 4% rule has worked every year since 1871, (4) despite World War I and II, the Great Depression, 9/11 and the resulting War on Terror, the Great Recession, and the COVID-19 pandemic.
Despite its historical performance, past results do not predict future returns and the 60/40 portfolio does have a few flaws.
- Reduced diversification. The fatal flaw in this strategy happens when interest rates are too low, as they are right now. This can cause the stocks and bonds to decline together instead of moving in opposite directions, thus reducing traditional diversification benefits. This can be a huge challenge for all investors, especially retirees.
- Increased risk. Just because you own both stocks and bonds in a 60/40 proportion doesn’t mean your risk levels are balanced. In fact, risk is not distributed proportionally to asset allocation. In reality, more than 90% of the risk in your portfolio is related to the 60% you own in stocks. So if the stock market crashes, you will not be able to rely on your 40% in bonds to protect 40% of your overall portfolio.
- Low yields, high inflation. Yields on long-term bonds are historically low, at 1.30% compared to the 14% high in 1982. (5) Coupled with rising inflation and the expectation that interest rates will also rise, many experts question how today’s bonds can sustain the retirement withdrawals of the traditional 60/40 portfolio.
What Does That Mean for Retirement?
So, what do these pros and cons mean as you plan for retirement? The answer is: It depends on your specific situation. Probably not the answer you wanted to hear, but the truth is that factors, including age, retirement timeline, other sources of retirement income, and risk tolerance, all play major roles in selecting an asset allocation strategy.
That being said, many investors are considering alternative assets as a way to hedge against risk since they are less correlated with the stock and bond markets. Alternative assets include:
- Private equity: An investment directly into a company that is not publicly traded
- Venture capital: Investments in start-up companies
- Real assets: Including timber/farmland, infrastructure, and real estate
- ETFs and mutual funds: Can offer access to alternative assets that have traditionally been too expensive for the average investor to utilize
- Cryptocurrency/digital assets: Intangible assets that are designed to be free from government manipulation and control by remaining entirely digital. They provide a strong hedge against inflation and have become a more common investment option in recent years, especially among high-net-worth investors. We have a major announcement involving crypto investments coming soon, so stay tuned for more information on this!
It’s best to fully assess your specific situation with a qualified professional in order to determine what, if any, changes need to be made to your overall retirement plan.
Partner With a Professional
If you’re approaching retirement, or thinking about a change to your investment strategy, consider partnering with a professional. At J2 Capital Management, we can analyze your unique situation and determine the best asset allocation for you. Schedule a meeting online or reach out to us at email@example.com or 248-641-4444.
About John Benedict
John Benedict is CEO, investment advisor representative, and portfolio manager at J2 Capital Management, a boutique financial advisory firm specializing in in-house custom financial planning, tax, estate, and investment management. With over 20 years of experience, John is passionate about helping clients navigate uncertain markets, reduce risk, and plan for a sound future. John combined his talents and passion in statistics and technical analysis to create J2’s tactical strategies, managing them since the beginning of the organization. He is known for being a visionary and continually looking for ways to improve J2’s services and strategies to better serve his clients. John graduated from Central Michigan University with a degree in business administration and finance, and his thoughts on markets and technical analysis have appeared in The Wall Street Journal, Investment News, and on Moneyshow.com. He was also a contributor to the book The StockTwits Edge: 40 Actionable Trade Set-Ups from Real Market Pros.
When he’s not working, you can find John boating or participating in water sports and spending time with his wife, Janine, and his three children, Jack, Alexis, and Saraphina. To learn more about John, connect with him on LinkedIn. You can also register for his latest webinar on What Makes J2 Capital Management Different From Other Financial Advisors.