60/40 AA may not work in the future

[Spanky]

I read a few articles saying a 60/40 has performed nicely for almost 20 years but that the future returns of equity and bonds will be much lower. Low yields from bonds may not be sufficient to keep up with inflation. The suggestion is to allocate up to 40% of portfolio to high-yield bonds, convertible stocks, REITs, and energy, 20% to traditional bonds, and 40% to stocks.

Thoughts and comments?

 

[RobbieB]

Go for it.

 

[audreyh1]

Nobody knows nothing when predicting the future.

 

[RetiredAt55.5]

I think they're going to be either mostly right, or mostly wrong.

Or I could be wrong.

 

[Koolau]

Any time I've taken the advice of an "article" or even an "expert", I've ended up regretting it. I have a "plan" (probably not right for most folks here.) So far (15 years in) it's been working. Think I'll stick with it a while and ignore other's advice. I'm not only responsible for my own investing - I have to live with the results. When I find an expert willing to share in my gains or losses, MAYBE I'll listen. NAAAaaaahhhh! YMMV

 

[Out-to-Lunch]

 

[GR111]

Today is so much better than when I started investing in the early’80s. Back then we had no information and paid big commissions.

The market will obviously have ups and downs. Low rates may mean lower returns in fixed income, but also means less expensive capital for innovative companies to use for growth- but no one has a crystal ball.

I like the bucket approach to AA. Morningstar explains it well, but simply any funds you need within six years or so are in buckets 1 and 2, cash and fixed income. Long term funds you don’t need for more than six years are in bucket 3, equities. Reallocate annually unless the market is really down, so you never sell in a down market unless the down market lasts over six years.

This approach let’s me keep more in stocks and still sleep at night. I will let you know how it all works out.

Good luck!

 

[Midpack]

More risk is more risk.

 

[DrRoy]

Part of the reason to have bonds is that they are less volatile than stocks, and to some degree tend to perform counter to stocks as well. High yield, convertables, REITs, and energy are quite volatile, perform similar to stocks, and thus are not very diversifying.

 

[Dtail]

We don't really know if the low yield scenario will continue for many years, as all this stimulus could eventually lead to higher inflation and yields and then back down again.

 

[big-papa]

These choices will likely increase your overall volatility and may or may not produce better returns in the long run than a traditional 60/40.. Lots of people hold bonds mainly for ballast against their stock holdings in order to reduce volatility, knowing that over the long term bonds always produce lower returns than stocks do. 2008 showed the value of holding bonds and it's also happened again this year despite low bond yields. They don't do it for the returns on bonds per se. Others care only about very long term returns and are able to ignore the rougher ride, which is why you also see lots of people with 100% (or near 100%) stock portfolios.

So OP, which are you? Why do you hold bonds today: for their long term returns or for shorter term ballast against your stocks? Neither is a bad choice necessarily, but it does makes sense to think long and hard before making wholesale changes to your portfolio.

Cheers.

 

[OldShooter]

More risk is more risk.

However, volatility is not risk.

 

[jimbee]

... Thoughts and comments?

Someone had an article deadline to meet.

 

[Ed_The_Gypsy]

SS is our bond fund.
VIG and NOBL are our equities now.

 

[Montecfo]

I read a few articles saying a 60/40 has performed nicely for almost 20 years but that the future returns of equity and bonds will be much lower. Low yields from bonds may not be sufficient to keep up with inflation. The suggestion is to allocate up to 40% of portfolio to high-yield bonds, convertible stocks, REITs, and energy, 20% to traditional bonds, and 40% to stocks.

Thoughts and comments?

I think as long as you keep 20 percent in bonds/cash something like this is probably can work for the next 2-3 years with super low rates likely to prevail. In fact I have made some similar moves.

You just have no upside in bonds right now, but a great deal of downside.

And it can't be a mindless allocation. You're going to need some specific sectors within the REIT world for example. And same with energy selections. I presently have no exposure there but am looking. It is all a matter of the individual securities

 

[VFK57]

We see the depression caused by the pandemic. Post pandemic economy is very difficult to predict. Everyone understands that a country which will resolve the pandemic first would have an advantage over others but the earliest approved and licensed vaccines, like the Russian Sputnik 5, was not properly checked on a long term side effects and they could be deadly or health damaging while defending from the COVID. Because of the above, investing is risky no matter what you plan to invest into, similarly like keeping only cash. In my case, I keep everything as it was with little changes in equities.

 

[Spanky]

So OP, which are you? Why do you hold bonds today: for their long term returns or for shorter term ballast against your stocks? Neither is a bad choice necessarily, but it does makes sense to think long and hard before making wholesale changes to your portfolio.

Cheers.

I am holding 60% in short-term bond funds for capital preservation. No plan to change soon.

 

[ut2sua]

I read a few articles saying a 60/40 has performed nicely for almost 20 years but that the future returns of equity and bonds will be much lower. Low yields from bonds may not be sufficient to keep up with inflation. The suggestion is to allocate up to 40% of portfolio to high-yield bonds, convertible stocks, REITs, and energy, 20% to traditional bonds, and 40% to stocks.

Thoughts and comments?

What you have proposed is just a modified 80/20 portfolio. If you can accept that level of volatility, then go for it. In the current low rate environment, the bond portion (for me, bond portion = cash, CD, short term, inter term bonds) is there to dampen the volatility of your porfolio (that is why many are keeping bonds in their AA). It also allows the extra flexibility to rebalance if/when stock crashes. One advice I have learned is: don't read and react to current news/articles, you will tend to make moves that could be regreted later. Learn more about investing by checking out the bogleheads site.

 

[Perryinva]

It depends on how old you are and what your income exposure risk is. In times like this, I cower much (60-70%?) to mostly safer places that may only meet inflation since we have most of our (70%?) income from non investment sources that more than pays the bills. For us, risk of loss out weighs FOMO. I Invest in what I know when it makes sense, which has done over 10% over the last 12 months. Good enough for me.

 

[Badger]

Nobody knows nothing when predicting the future.

Exactly!



Which is why I have split all my nest egg into portions in which any way the wind blows I will have enough in at least one of the portions to see me until the end. Note: We are both in RMD phase, collect SS, have all our medical covered, own our home, and owe no one even a penny.


We started planing for every contingency years 30+ yrs ago. That has made a difference. My father probably thought I wasn't listening to him when I had long hair and was wearing tie-dye.


Cheers!