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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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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.

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