When it comes to retirement investing, one of the traditional strategies to follow is the 60/40 rule. Although not supported by all experts, the approach has been defended recently as Vanguard Group addressed all clients. Essentially, they said that the strategy helps investors to deal with market volatility (which is critical, considering we’re in the middle of a global pandemic!).
In case you haven’t heard of the rule before, it says that 60% should go into stocks while 40% should sit in safer investments such as bonds. Over the years, many had spoken out against the rule, including Bank of America BAC, when they declared it dead. They believe that attention should go towards equities rather than bonds.
What does this mean for you? Well, it’s always good to reconsider the makeup of your portfolio. One financial advisor has said that managing risk and enjoying consistent returns come from a more diverse portfolio considering the interest rate environment we have right now.
If you have an investment with bonds and equities, one problem is that bonds don’t guarantee safety during market volatility. There are benefits to Treasury Bonds, but panic often leads to the selloff of asset-backed securities and corporate bonds. Also, there’s nothing in commodities nor protection against inflation.
For some, their issue with the 60/40 rule is that it isn’t tailored to the individual. They will say that every good portfolio should be tailored to the holder’s age, savings, expenditure, pension, Social Security, and other factors. Asset allocation is a similar debate for us all, but where we end up is entirely different. Therefore, there are more people now expanding beyond the two traditional asset classes of bonds and stocks. By including more asset classes and considering your position, this allows for a personalized strategy.
For us, the attack isn’t necessarily on the 60/40 rule, it’s against one-size-fits-all strategies. Since we’re all in a unique position, it doesn’t make sense that a cookie-cutter approach will benefit everybody. Recently, there has been a wealth of support for the ‘bucket’ approach. Here, the portfolio is split into ‘buckets’ and invested differently to achieve each bucket’s goals.
Summary
For those with minimal experience, Goldilocks Portfolio, the 60/40 rule, is a strong place to start. It doesn’t take too many risks and doesn’t provide the best protection. But it will help to build funds in line with cost-of-living expenses.
With a 100% equity portfolio, any market volatility (such as the one experienced in 2020) will cause heavy blows. Simply having some money in bonds provides at least some protection.
We think the reason that this rule has come under so much pressure is because of two things:
• The 60% portion has been weakened by the ending bull market
• The 40% portion has been weakened by lower interest rates
However, we can’t make retirement decisions based on short-term factors. Instead, we need to think about full cycles and how our retirement funds will look by retirement. Over time, stock prices will change with interest rates.
