Experts debate 60/40 portfolio mix of stocks and bonds

Two experts debate the 60/40 portfolio mix of stocks and bonds to build an adequate savings for retirement.
By MARK JEWELL Published: January 20, 2013
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If you're 40, you've got around 25 years before retirement. That's a long time. With significantly more than 60 percent in stocks, you'll have a much better chance to achieve your retirement savings goals than you would with just 60 percent.

While an aggressive allocation to stocks makes sense at that age, that doesn't necessarily mean you can rely on alternative assets to diversify a portfolio. The problem that a 60/40 portfolio presents is that you can't rely entirely on bonds as a diversifier, either. They have been good diversifiers in recent years because we've had low inflation. In fact, higher-quality bonds like Treasury notes have been especially good diversifiers. But if the future risk we face is from rising inflation, bonds aren't going to help.

KINNIRY: It's true that there are challenges now for investors with 60/40 portfolios, because of the risks bond investors face. It will be mathematically impossible to replicate the strong returns that bonds have delivered over the last 30 years.

But I'd warn investors who want to leave traditional bonds for more exotic asset classes. It has not been demonstrated that those assets can diversify a portfolio when stocks are falling. We shouldn't expect alternative assets to provide a diversification benefit during the next bear market.

Consider the performance of the larger college endowments that invested in alternative assets over the years. Traditional stock-bond portfolios have been killing many of those endowments in terms of performance.

Vanguard has done research examining the performance of various assets, including alternatives, when stock performance has been the worst. Nearly all the assets posted losses at the same time that stocks were plunging. There were only two assets that had positive returns during those periods: Treasury bonds, and investment-grade corporate and municipal bonds.