The 60/40 rule is a classic investment strategy, but whether or not it's useful is an open question.
Not all financial advisers and investment professionals say this is the best choice when you are saving for retirement. The Vanguard Group recently defended the strategy in a communication to its clients, stating that asset allocation enables investors and their portfolios to combat volatility – for example during the current global pandemic. The 60/40 rule stipulates that 60% of the portfolio is invested in stocks and 40% in bonds or other “safe” classes.
Read:Vanguard defends the 60/40 portfolio
By comparison, some financial services companies like Bank of America BAC have stated that the 60/40 rule is essentially dead. In a research report published last year entitled "The End of 60/40," Bank of America portfolio strategists said, "There are good reasons to reconsider the role of bonds in your portfolio." Instead, investors should think about theirs Pay more attention to stocks.
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For some investors, it may be a good idea to rethink the 60/40 construction. "It's a good core portfolio that has performed well, but given the current interest rate environment, it makes more sense to use a much more diversified portfolio to reduce risk and produce more consistent expected returns for investors," said Thomas Rindahl, financial advisor at Truwest Wealth Management Services.
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Investing in stocks and bonds are also critical to how effective it is in protecting investors from sharp declines as they continue to grow. Exposure to bonds alone is not enough to hedge against large volatility, said Matthew McKay, investment analyst at Briaud Financial Advisors. Government bonds would be beneficial, but corporate bonds or asset-backed securities tend to panic in sell-offs. There is also no protection against inflation or raw material stocks.
The strategy is also generic and does not take into account personal needs and factors such as age, expenses, amount already saved, and other expected retirement income such as social security or retirement, said Larry Luxenberg, principal at Lexington Avenue Capital Management. "Everyone should think about asset allocation, but where they end up is an individual matter," he said. Rather than restricting a portfolio to just two asset classes – stocks and bonds – investors should look at these and other asset classes. "I contend that investing based on age or expected retirement while only considering two types of assets (stocks and bonds) is a little thoughtless," McKay said.
The bucket approach could be better, dividing portfolios into “buckets” for different goals that are invested differently to achieve those goals, said Marguerita Cheng, chief executive officer of Blue Ocean Global Wealth. "Sixty-four isn't necessarily dead per se, but cookie cutter or template models may not work because not all situations are created equal," she said.
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Still, it's a good starting point. The 60/40 rule is also known as the "Goldilocks portfolio," said Mackenzie Richards, financial planner at SK Wealth Management. "Not too risky, but not overly safe," he said. "Something that enables a retiree to keep up with the rising cost of living."
During volatility, the presence of bonds in a portfolio still prevents such sharp falls in stock flip, said Herschel Clanton, president of Chancellor Wealth Management. "The 60/40 portfolio still has value," he said.
Some experts might say that the portfolio strategy is dead because the bull market is over, which weakens the 60% portion of the allocation, and interest rates are low, which hinders stable income from the 40% side, Richards added.
But that's a short-sighted perspective, he said. "These market prophets tend to focus on the short-term situation rather than thinking about the various market cycles a retiree will experience over the course of their life," he said. "With these cycles, as we've seen over the past 100 years, both stock prices and interest rates will fluctuate."