If you are getting closer to retirement age…or if you’re just a super conservative investor terrified of risky investments that may lose money…then you’ve probably heard you should have a 60/40 portfolio.
That means 60% in stocks, which historically rise over time, and 40% in bonds, which offer steady income and more security.
But is the equation an anachronism in an age when interest rates and bond yields remain historically low despite a recent series of rate hikes by the Federal Reserve?
Just look at what’s happening this year.
Despite a recent rally, both bonds and stocks have been selling off. The S&P 500 is down more than 11% while the iShares 20+ Year Treasury Bond ETF (TLT), a popular fund for bond investors has plunged 22%.
“We encourage investors to look for investments that don’t trade just like everything else they own,” said Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund (IVOL), in a report.
Some experts also believe investors should consider getting more aggressive and buy more stocks.
After all, a lot of blue chip stocks pay dividends, and not just humdrum utilities and real estate companies. Apple (AAPL) and Microsoft (MSFT) offer steady (and growing) dividends, for example.
“Bond investors are expecting the economy to cool down, but equity investors are still looking at decent earnings. There are companies with pricing power and stocks that generate income,” said Wayne Wicker, chief investment officer at MissionSquare Retirement.
“A 60-40 portfolio is not properly positioned in periods such as this where inflation is running hotter than bond yields,” he added.
Bonds are still a great source of income and diversification
Still, there’s probably a case for some bonds in a retirement portfolio. The 10-year Treasury yield is hovering around 2.8%, which is significantly higher than the 1.5% level where it ended 2021. Long-term bond yields should keep climbing if the Fed continues to boost short-term rates.
“We believe that the 60/40 portfolio will continue to be an effective strategy for investors, and that reports of the death of the 60/40 portfolio are greatly exaggerated,” said Douglas Beath, global investment strategist with the Wells Fargo Investment Institute, in a recent report.
Beath noted that although this strategy has not worked in 2022, a mix of stocks and bonds tends to perform well in most periods and bonds “provided a significant hedge during these periods of stock market volatility.”
Along those lines, a 60/40 portfolio should be able to generate annualized returns of about 7%, according to Vanguard.
“Periodically, pundits declare the death of the 60% stock/40% bond portfolio. Their voices have grown louder lately, amid sharp declines in both stock and bond prices,” said Roger Aliaga-Díaz, chief economist of the Americas and head of portfolio construction for Vanguard, in a report last month.
Allaga-Diaz conceded that the best portfolio mix depends on your age and tolerance for risk.
For younger investors, an 80/20 or even 90/10 stocks-to-bonds mix might be best. But for those closer to retirement, a 30/70 allocation may be more appropriate. Either way, there should be some bonds and some stocks.
“We’ve been here before. Based on history, balanced portfolios are apt to prove the naysayers wrong, again,” he added in the report, titled “Like the phoenix, the 60/40 portfolio will rise again.”
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