Happy November Ultimate Garages Members
Let me ask you a question, “Is the 60/40 portfolio dead?
There have been many articles over the past year with this title or something similar. Seeing that there has been a growing number of financial news running these types of articles, I felt that sharing facts surrounding the issue would be helpful for you, and hopefully interesting as well. I have strong opinions on the argument for a diversified portfolio, and for most high-net-worth individuals, I find that the majority have modeling that is properly balanced and contain equity/bonds/cash components similar to a 60/40 model, which is necessary for proper moderate management and diversification. The diversified moderate portfolio is important especially for retirees who are withdrawing monthly for maintaining their lifestyle. It’s one thing to invest as a “buy and hold” investor, and it’s totally different when withdrawals happen. In addition, most retirees and advisors agree that it’s important to maintain a moderate retirement profile given the retirees “age and stage”. There are 3 levels of moderate allocation, with those being Moderate Conservative, Moderate, and Moderate Aggressive. Most retirees own blends of Moderate and Moderate Aggressive, and older or more conservative retirees may choose to add some Moderate Conservative to the mix.
I asked Rick Wedell, Chief Investment Officer for RFG Advisory, to give his thoughts on the popular 60% equity/40% bond portfolio. As always, I find Rick’s insight very helpful and clear, and I would like to share Rick’s observations with you:
“The 60/40 portfolio is really designed to take advantage of the typical inverse correlation between bonds and stocks in times of economic turmoil. This lessens the volatility of the overall portfolio, which greatly improves the odds of success when clients are taking regular distributions. By holding bonds that typically go up when stocks get hammered, you create a more stable source of value to draw from in tough times.
Think of it this way – most of the time, our equities grow ~10% per year, and we take our distributions from those holdings. When recessions and economic turmoil hit, our stocks normally sell off precipitously. We’d rather not sell those for distributions when they are low. So instead, we can turn to our bond portfolio to fund distributions, which normally does quite well during turmoil. In fact, we usually can even take some of the gains in our bonds and use it to buy MORE equities at lower prices, via rebalancing.
There’s been a lot written about the 60/40 model given last year, as bonds and equities were both down due to interest rates rising. I understand why the articles were written, but the truth is – going all the way back to 1976, there’s only been two years in which both stocks and bonds had negative returns – 2022 and 1994. That actually makes sense, because in 1994 Greenspan raised the federal funds rate by 300bps, and so we got a market response similar to what we saw in 2022, when Powell was raising rates. There’s really no portfolio that does well in a rising interest rate environment since it impacts the valuation of all future cash flows – there’s not really any good place to hide.
That said, a portfolio that works VERY well in ~48 out of 50 years is still a winner in my book. The bonds in the portfolio will still rally in the event of economic chaos (recession), which is why they are there in the first place. In fact, if anything, bonds are on sale versus where they were 18 months ago.”
Well said Rick, and I hope this insight has been helpful for you! If you would like to speak with Rick and me about this subject, or any subject, we would be happy to schedule a Zoom or phone call.
Best regards, and please feel free to reach me on my cell at 314-277-2740.