A 60% stock, 40% bond portfolio is like a grilled cheese sandwich: unimpressive, but with just two simple ingredients, it’s easy to construct and usually satisfying. In a world where more exotic investment decisions often end in financial ruin, the 60/40 is a nice “default” portfolio for retirees. You’d think the boilerplate nature of the 60/40 would allow it to fly under the radar, but surprisingly, it’s under constant attack:
The Wall Street Journal’s recent assault was one of the most popular stories on the site last week, asserting that with today’s interest rates and inflation, the 60/40 “isn’t cutting it anymore.”
Before defending the 60/40, I think it’s worth theorizing about why seemingly every financial outlet takes aim at it. What’s with the hate for the investment industry’s grilled cheese?
I think it stems from the industry’s general disdain for unsophistication. That, and envy.
The most basic version of the 60/40 consists of 60% S&P 500 Index and 40% Aggregate Bond Market Index. Using Vanguard ETFs, you can access this portfolio for just 0.03% (i.e., for every $10,000 invested, only $3 goes to Vanguard). And performance is pretty good too, +5.8% annualized since 2000.
Solid performance, decent diversification, and excellent tax efficiency at near-zero fees—that’s tough to beat! Year after year, financial journalists and other professionals sucker punch the 60/40 before declaring ways to improve it (some of which are better than others).
But the critics fail to appreciate that the 60/40’s simplicity makes it an elegant starting point for millions of retirees who otherwise wouldn’t know where to begin. When you come across the next 60/40 hit piece, keep in mind: flashier alternatives could result in much worse outcomes for millions of Americans.
Now, onto the particulars of this WSJ article.
One suggestion the author makes for improving upon the 60/40 is “replacing some part of their S&P 500 allocation with international stocks or shares of smaller companies.” These are prudent diversifying moves that vastly improve the portfolio’s risk/return characteristics. They can even help investors avoid a “lost decade.”
He also writes about the dangers of interest rate risk, and he’s spot-on. The Total Bond Market Index alone is probably too risky for most retirees—it’s currently mired in its worst stretch of performance in history. Since 60% of the portfolio is in stocks (high risk/high potential reward), it’s crucial that the 40% in bonds brings stability, which means acutely dialing back interest rate risk to match a retiree’s risk tolerance.
Another alternative to the 60/40 is, “looking beyond stocks and bonds altogether to more complex investments, often ones that are riskier and charge higher fees.” That recommendation seems shakier. As Jack Bogle once said, “Fund performance comes and goes, but costs are forever.” In your quest to improve the 60/40, you shouldn’t override its positive qualities (low cost and tax efficient).
Despite the constant attacks, the basic 60/40 will endure. What it lacks in sizzle it makes up for in substance, which is usually a sound approach to investing. But it’s not a “one size fits all” portfolio. What’s generally right, can, in specific circumstances, be extremely wrong. Nobody should blindly assume a 60/40 is the right mix for them. And if it turns out that 60/40 is an appropriate mix for you, I’d recommend going beyond the most basic version. Grilled cheeses are good, but the added effort to swap American cheese for brie and add bacon makes them so much better.
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