BOSTON — Is it time to retire the idea of a 60/40 portfolio? The strategy has been generally regarded as a good starting point for most investors.
But many experts question whether a mix of 60 percent stocks and 40 percent bonds is suitable. Over the years, 60/40 has become a rough gauge for how to build adequate retirement savings without taking excessive risk. Typically, it's promoted as a sort of default portfolio balance for investors in their 40s, or even closer to retirement.
The basic rationale: Keep most of your retirement savings in the stock market, because stocks are likely to provide greater long-term growth than bonds. But when stocks fall, you'll want a significant percentage of your portfolio in bonds to cushion against steep losses.
Many suggest it's important to have more than 60 percent invested in stocks. That's because retirement can stretch for several decades, and investors will need to increasingly rely on stocks to limit the risk of outliving savings. Also, the long-term outlook for bonds is poor.
Another criticism: 60/40 is too narrow an approach to build a truly diversified portfolio because it fails to consider alternative assets classes. Think of investments in commodities such as oil, precious metals or real estate investment trusts. Alternatives may also include using complex strategies that hedge funds pioneered to protect against losses when stocks plunge or inflation spikes.
The Associated Press interviewed two experts in asset allocation to try to get to the heart of the debate. One is a 60/40 critic: Ben Inker, co-head of asset allocation for GMO, a Boston-based manager of $104 billion for institutional clients such as endowments and pension funds.
Also weighing in is Fran Kinniry, who embraces traditional stock-and-bond portfolio construction. He's a principal in the investment strategy group at Vanguard, the nation's largest mutual fund company.
Below are edited excerpts of their arguments on whether a 60/40 portfolio remains a good tool for middle-aged investors trying to build up retirement savings:
INKER: One reason I'm skeptical about 60/40 is that it's probably not aggressive enough, at least for a 40-year-old investor. You need to invest more in assets that are riskier than bonds if you want to meet your investment goals without having to save an extremely large percentage of your income.
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.