What About The Traditional 60/40 Portfolio?

with No Comments

The Wealth Advisor has an interview with Burton Malkiel, author of “A Random Walk Down Wall Street,” entitled, “Investing legend Burton Malkiel on day-trading millennials, the end of the 60/40 portfolio and more .” Malkiel is asked about the traditional 60/40 portfolio of stocks and bonds and he answers:

Malkiel: I don’t think there ought to be a 60/40 portfolio. I think there ought to be a broad diversification. What I have recommended in the new edition of my book is, maybe for retired people, the bond allocation might be a lot less. Not that you don’t need some safe assets or some income-producing assets, but there may be a better way to get them than through bonds. Basically, safe bonds now do not provide income and in the long run may have some real risk, because if we do get some inflation in the future, yields will rise and their prices will go down.

Even in the midst of the downturn Malkiel suggests that the bond allocation might be a lot less than 40%.

In our age-appropriate asset allocation models, we don’t recommend a 60/40 portfolio until you are between age 80 and 87, and spending the maximum that you can according to your safe withdrawal rates. Age 80 is when the age-appropriate asset allocation suggests keeping 40% in bonds to satisfy the next seven years of 6.22% spending (counting on the bonds providing a small amount of growth over inflation).

For a typical age-65 senior, we recommend having between 20.24% and 27.54% in Stability (Bonds). This Stability allocation represents 5-7 years of maximum safe spending rates adjusted for growth. We recommend putting the remainder of your investments in Appreciation (Stocks).

If your lifestyle is small compared to your assets, you can afford to vary from these recommendations either by being more aggressive (because your spending for the next 5-7 years is smaller) or by being more conservative (because you don’t need the appreciation that comes from stock returns).

The advantage of the 60/40 portfolio was that it is easy to stick with, eliminates the need to try to time the markets, and had been doing fairly well even when stocks are down because of historically higher interest rates. Now that interest rates are extremely low, the wisdom of having less in bonds is seen more clearly by even those who have not done the math to explain the strategy.

Over long time periods, the 60/40 portfolio is likely to significantly underperform both an all-stock and an 80/20 portfolio.

The odds are about 75% that each year is going to be a positive year regardless of how good or bad the previous year was.

Fear is a bad reason to favor bonds. Playing it safe risks making perhaps the most dangerous investment mistake: forgetting about inflation.

There are reasons to have the stability of fixed income investments for a portion of your portfolio, as we show in “Your Asset Allocation Should Be Priceless,” but it is best to have the math to justify the stability allocation you are selecting.

Photo by Manki Kim on Unsplash

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.