The Death of the 60/40 Portfolio is Greatly Exaggerated

May 2012

My profession is deluged with numerous investment articles about nearly everything you can imagine about the stock market, international investing, hedge funds, portfolio construction, and other topics. I read an article recently that caught my eye and was picked up and written about by Bret Arends, a regular columnist for the Wall Street Journal and frequent guest of money talk shows. Mr. Arends writes a regular column for WSJ about mostly investment-related topics. He should stick to writing and give up trying to be an advisor to his readers.

Mr. Arends is claiming that too many investment advisors are recommending investment strategies that just won’t work in today’s market. In particular is the famous 60/40 portfolio, which is made up of 60% stocks and 40% bonds. This allocation was made famous by many pension funds as being an efficient allocation because it provided returns as good as the stock market, but with lower volatility. He claims the 60/40 portfolio is flawed and was based on flawed logic. He also said that contrary to what investors are being told this type of portfolio comes with no guarantees. I don’t know what other advisors are “telling” their clients, but I don’t know any credible advisors that are guaranteeing the success of any investment strategy.

Firstly, there is no portfolio that guarantees success, and that includes one invested in hedge funds, options, commodities, real estate, annuities, TIPs, and on and on. Unfortunately, there is no magic portfolio I am aware of that will help guarantee investment success. As Mr. Arends rightfully points out, the past 30 years revealed that a 60/40 mix was reasonably efficient with respect to achieving good returns and lower volatility than the overall stock market. However, what Arends fails to expound on is that most investors have a difficult time staying with a 60/40 portfolio, or any investment strategy because of their irrationality to fear and greed. The problem isn’t with the investment mix; rather it’s with how investors react to the market’s ups and downs.

So when the stock is declining as it did during the 2008 meltdown and last summer’s Greece swoon, how many investors stuck with their investment strategy?

Secondly, the 60% allocated to stocks is not entirely invested in the S & P 500, nor is the 40% in bonds invested entirely in long-term Treasury bonds. I have been at Bloom Asset Management for nearly ten years, and in those ten years, we have made substantial changes to our strategies that included adding asset classes such as TIPs, emerging market bonds, global real estate, commodities, and others in an effort to help performance and reduce risk. Advisors are working diligently to construct portfolios that will help clients sleep better at night. We rarely make investment decisions based on what happened 30 years ago let alone 85 years ago as Mr. Arends seems to think. He ought to give advisors more credit than that.

It’s interesting to note that a diversified portfolio containing many of the asset classes Mr. Arends finds more attractive than stocks and bonds did not help protect portfolios much during the 2008 downturn. We have been careful not to make any longer term conclusions about what happened to those asset classes during the financial crisis because we are not sure how all these credit-related crises will impact them going forward.

The reality for most investors is, they don’t or can’t fully commit to any investment strategy whether it is based upon a 60/40 allocation or anything else. You could have the most optimal investment portfolio that on paper should perform well, but if investors can’t commit to it, then how will they ever achieve their goals? The mere fact that people sell out of the stock market at the first signs of trouble will doom any investment strategy before it even gets started. The most important action investors can take is working with a competent financial advisor that understands their situation and has an investment philosophy that is flexible enough to make adjustments when necessary.


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