It's an age-old debate in investment and life: Should you remain with what you know performs or try something new that may be better? That is what some financial advisors & investors are attempting to determine with the most typical 60/40 portfolio. For years, this was the standard investment strategy: 60% stocks and 40% bonds.

Is It Wise To Use The 60/40 Rule As An Investment Strategy?

A mix of bonds and stocks allows you to grow your money while providing safety and stability. Consider it the family minivan. It's not particularly appealing, but it's powerful and dependable, and it'll get you from point A to point B. When providing someone with portfolio advice, a professor of income for life at the American College of Financial Services said it was a good place to start.

The objective was to strike a reasonable balance of risk and profit. But you don't hear much about this adage regarding money these days. Some market observers believe the concept is no longer viable, will take investors off a cliff, or is even dead.

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Cognizant Consultants in Los Altos, California, employs a financial advisor. Why would everyone utilize a 60/40 split to increase their savings if that wasn't the case? I'm not sure when the 60/40 split became so common, and it shouldn't be assumed that it's suitable for everyone.

One of the most significant issues with a 60/40 portfolio is that it cannot be altered. However, there are others: In today's investment environment, where there are many other assets you would use to diversify your portfolio, the traditional stock-bond split is too straightforward.

Bonds are also causing a lot of concern in the current economy. This indicates that the safe portion of the 60/40 portfolio may not have been as safe as you thought. Keith Singer of Boca Raton, Florida-based Singer Wealth Advisors should be aware that I believe the 60/40 strategy is obsolete.

The 60/40 approach performed well when bonds paid 6-8% and interest rates fell. However, as the saying goes, what happened previously does not guarantee what will occur. This is particularly true for the 60/40 portfolio. Since rising interest rates, the 40% meant to minimize risk is now dangerous. When interest rates rise, the value of bonds falls.

60/40 investment portfolio performance

Despite this, the 60/40 portfolio has performed well over long periods. QuantStart discovered a compound annual growth of 7.1% for a 60/40 portfolio from 2003 to 2019, which was not far behind the results of an all-stock portfolio and was significantly less volatile.

According to Vanguard Group, a large investment firm, 60/40 provided a remarkable yearly return of 9.1% from 1926 to 2020. The chief investment officer of Miami-based Kaufman Rossin Wealth believes reports of the firm's demise are unfounded. For small portfolios, an old-fashioned 60/40 split will suffice.

When Vanguard examined the figures for the volatile first half of 2020, it discovered that the plain old 60/40 was the best option. Global stocks sank 6%, but a 60/40 split dropped only 1.5%. This enabled investors to remain in the market because owning a well-balanced portfolio is the whole point.

What You Should Know About a 60/40 Portfolio

However, 60/40 does not operate as effectively with larger and more complicated portfolios than more advanced investment products. A smarter plan would be more flexible in asset distribution, adjusting percentages over time and incorporating different asset classes.

Here are a few points to consider as you decide how to divide your portfolio:

Bond projections are pessimistic

Having 40% of your assets in fixed income is acceptable during a long bond bull market. However, if interest rates rise, the math may alter. For example, Vanguard's Long-Term Bond Index (BLV) is down over 10% in just six months. Bonds aren't looking good right now. They don't pay you anything in return, and bond funds lose value as interest rates rise. Perhaps this is why 60/40 isn't discussed as frequently.

Age is significant

The correct investment combination for a 20-year-old is not the same as the right mix for an 80-year-old. With so much time ahead, younger investors should typically have had more than 60% of their money in equities. At the same time, someone far into retirement must have many more bonds than cashless investments that are expected to change in value.

As a result, target-date funds are becoming increasingly popular. They alter your allotment over time. According to the most current data from investment giant Fidelity, 55% of 401(k) investors on someone's platform had their money in target-date funds.

Consider the following alternative assets

A straightforward 60/40 split made sense in the past because it was more difficult to invest in disparate assets. However, there are a million methods for tiny investors to obtain a piece of real estate, metals, or any other form of asset.

This may provide you with additional possibilities than only bonds. For example, Fidelity's Freedom 2035 target-date fund includes commodities, real-estate income, and starting-to-emerge stocks, which aren't typically seen in classic 60/40 portfolios.

According to David Mullins, a financial consultant in Richlands, Virginia, the 30-year bond bull market is likely gone. The concept behind 60/40 portfolios is to have assets that do not complement each other. This prevents the highs from becoming excessively high and the lows from becoming excessively low.

I encourage investors to investigate other asset classes to achieve the same degree of diversification and smooth the ride. Commodities, gold, REITs, international and emerging-market shares, and bonds can help minimize volatility and improve expected returns.