BOSTON (AP) — 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.
That approach is under fire. 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. Their yields are near all-time lows and interest rates are certain to eventually climb.
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. These approaches may sound uncommon, but they're readily available. Hundreds of mutual funds using alternative assets or strategies have been launched in recent years.
The Associated Press interviewed two experts in asset allocation — the mix of stocks, bond and alternatives in a portfolio — 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. He also co-manages Wells Fargo Advantage Absolute Return (WARAX), a mutual fund that uses alternative strategies.
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, managing more than $2 trillion.
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. Your main investment goal at that point in life should be trying to generate the highest return on your savings.
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