Questioning the 60/40 AA guideline, suggesting 60/20/20?

[ER Eddie]

Hello. ER.org has been my go-to source for investment advice for a long time, so I have a question for the financial gurus here. I would appreciate your input. For context, I'm a 64 year old man who is 6 years into retirement. I hold low-cost index funds in Vanguard and Fidelity with a 65/35 asset allocation split.

I have heard negative talk about bonds and the traditional 60/40 AA split. Specifically, I've heard that holding 40% bonds is a poor diversification strategy. The "experts" cited in the video below recommend something more like 60/20/20, with 20% going to gold, real estate, or something else that provides a better hedge on inflation than bonds. They say the 60/40 guideline worked well in the past but is a poor strategy now.

I am aware that "expert" advice can be found all over the map, and that experts often get it wrong. On the one hand, I don't want to be blown about by changing winds, but on the other, I don't want to have 35% in bonds if half that money ought to be sitting elsewhere.

Let me know what you think, please. I've always thought the ER roundtable was pretty solid.


"The 60/40 Investing Rule is Dead; Here is What is Replacing It:"

 

[razztazz]

He can't know what the new or guideline is until 50-100 years from now to see which combination of stuff worked best. Sounds like an advertisement for buying gold, which I guess is the best way to make money off of gold. Have tons of it and sell it to other people.

Not that I am agin' gold. Some thinks gold or real estate is worth having. Go ahead. They are real assets. But exclamations of "new rule!" "Better than bonds" "Not since 1997 has gold... something...nyaa nyaa.." ...not a good way to convince me.

 

[imjustawarrior]

I'm skeptical of people who say that the old ways don't work and this new way does. It feels to me that they need to say something different so they can produce material and generate income.

I'm 75/25. The equities provide the inflation hedge. The bonds smooth the ride. That has not changed.

 

[kgtest]

I think my signature says 100% equities... I can't totally recall, but that will be my plan for life. Edit to add I am likely gonna be fat fire not not FIREd yet, so maybe that context is important.

I get that if you had say 600k in equities and it dropped 35% like it did during COVID the month before you were about to put a down payment on your new dream home that might be bad...

But anyone in this forum should be able to whether whatever history has thrown at us due to diligent and re-occurring planning and strategizing! I am just not a total fan of bonds for some reason.

 

[ER Eddie]

He can't know what the new or guideline is until 50-100 years from now to see which combination of stuff worked best.

Good point. None of these experts are using a 50-100 year timeframe. It seems like they're just looking at the past 20 years.

I also suspect that his goals are different than mine. He is probably interested mostly in accumulating wealth. I'm interested mostly in preserving it, not having it go *poof* in a crash. I'm a fairly conservative investor, and he's probably more comfortable with a riskier strategy because he has a longer timeline.

 

[FREE866]

It's not my allocation , but 60/40 is certainly not "dead" and is totally appropriate for many people. Fearbait/Clickbait headlines like this video are misguided.

 

[mrfeh]

I have heard negative talk about bonds and the traditional 60/40 AA split. Specifically, I've heard that holding 40% bonds is a poor diversification strategy. The "experts" cited in the video below recommend something more like 60/20/20, with 20% going to gold, real estate, or something else that provides a better hedge on inflation than bonds. They say the 60/40 guideline worked well in the past but is a poor strategy now.

Garbage. Click bait.

Ignore it.

 

[COcheesehead]

Know your goals, invest accordingly. If someone wants current income, 40% bonds may be perfect. If someone is looking for other goals, other allocations may work. Invest to your goals.

 

[tulak]

I also suspect that his goals are different than mine. He is probably interested mostly in accumulating wealth. I'm interested mostly in preserving it, not having it go *poof* in a crash. I'm a fairly conservative investor, and he's probably more comfortable with a riskier strategy because he has a longer timeline.

I suspect his goals are to monetize his youtube channel.

Stick with what has worked for you.

 

[jebmke]

my policy is to not hold anything that can't be converted into food within a day or two (business day).

 

[GrayHare]

Bonds are an insurance of sorts and thus there is a cost to holding them during good times in other asset classes. Insurance pays off, however, when other things do not. Your choice of bond allocation should be proportional to your need for the insurance they provide.

 

[brett]

I believe that it is a combo of your level or risk aversion and the size of your investable assets.

If you more inclined to risk and you have excess investable assets whose decline will not impact your standard of living then you may well be inclined to accept more risk allocate a much higher percentage of your assests to equities.

OTOH, if you absolutely depend on 3 -5 percnet ROI spin off on your assets to form the basis of the majority of your retirement income then you might well be inclined towards a higher persentage of fixed.

We tend to go higher on equities. And even higher when there is a down market. This has worked well for us.

I do no believe in this so called rule (or any of these similar rules) because there are so many variables in the equation.

 

[ER Eddie]

Appreciate the input, folks. I was concerned that I might be too heavy in bonds and too light in something that might provide better diversification and protection. But I'm not hearing any support for that idea here.

 

[Al18]

CD’s, Treasury’s, MYGA - take your pick

 

[Semi-Retyrd]

Appreciate the input, folks. I was concerned that I might be too heavy in bonds and too light in something that might provide better diversification and protection. But I'm not hearing any support for that idea here.

Let me chime in here with my two cents. First let's examine the original idea behind 60/40.
You will hear the word "diversification" and everyone tells you it is good. Actually this is not always true!

The correct word to focus on is correlation. Mathematics tells us that if we combine two uncorrelated assets, the resultant portfolio has a lower standard deviation (a good measure of risk) than either of the assets by itself. This is always true!

But why stocks and bonds then? Well ...... if you look over a looooong span of years (like 100+) you find that stocks and bonds are on average uncorrelated (meaning a correlation coefficient near zero). But alas, the correlation changes with time sometimes positive, sometimes negative and sometimes pretty near the average of zero. Sadly in 2022 the correlation was very high and so the 60/40 failed to do what it was supposed to do.

Soooo... what to do? Is a puzzlement.

Some folks say "to heck with it. I'm just going for 100% equity and live with the wild ride." Others can't sleep with this choice and go all bonds.

Here's what I have done. I have searched for a bond-like fund that actively seeks to be uncorrelated to stocks that might replace a standard bond fund. I found EGRIX and for the moment it is working. I have attached a paper on the strategy of this fund below. Will this continue to work? I don't know. Que sera, sera. If I think it is no longer working, I'll search for something better and let our forum followers know. Cheers, Dennis

 

[Midpack]

First rule of YouTube is get clicks - a provocative title is crucial. A video titled “The 60/40 Rule is Dead” will generate way more clicks than “Why The 60/40 Rule Stands The Test of Time” - it’s that simple. When I click on contrarian sounding YT videos (and they’re all too common), more often than not they have caveats or even concede conventional wisdom is best for some people (deliberately vague as to how many). Besides, isn’t gold at a high now? A bad time to wade in?

 

[RetireBy90]

Yesterday's WSJ had an article with discussion on up and downs of gold over past 50 years or so. It pointed out that after last 2 times it has doubled in a short time (year or two) it dropped again and took many years to recover previous high. Nothing wrong with gold except it costs to store and doesn't pay a dividend, so doesn't go to work for you.
Gold miners can be a way around that as they tend to follow gold prices and can pay a dividend from earnings.
I like realestate and have a rental (managed by others) which in my lifetime has been a good place to store buying power. Not for everybody and it also has ups and downs but I get rent check every month. (excepting the months between renters.)
There are many ways to diversify, you could add annuities for a steady income. Do what your comfortable with and I would not go all in on any one investment, stocks, bonds, CDs, RE, gold, commodities, baseball cards, whatever.

 

[Steelpony]

I think the right way is personal, what you’re comfortable with and what you “guess” you’ll need into the unknown future. Many allocations work since when you pass is unknown.

For my concerns, experience and risk parameters I settled on about 2/3 steady cash flow and 1/3 equities which is heading towards half and half. Five to ten percent is cash. I just let everything go never rebalance etc. Just eyeball everything monthly at statement time.

Read Buffet’s opinion of gold.

 

[FLSUnFIRE]

I'd buy fine art before I bought gold.... If I wanted something that costs money to hold (storage/protection) and has no yield (although if I had a desirable enough piece of art I might be able to rent it out or charge to see it?)

 

[freedomatlast]

There hasn't been a 10 year timeframe in history that gold outperformed stocks. I hold no gold, almost no bonds and have a very high allocation of stocks. I have no international specific funds and don't rebalance. This is contrary to what most "experts" recommend. This strategy has worked out extremely well for me allowing a very comfortable retirement far beyond what I ever thought was possible. Do what you feel is right for you without listening to the talking heads.

I once worked with a guy that was scared to death of the stock market and thus had almost no money in stocks and was close to 100% in bonds. Every day he'd preach gloom and doom predictions of the stock market. He got fired from the company years ago, but at that time, there was no way there was any chance he'd retire before 70 based on the dismal performance of his bond portfolio.

While none of us know what the future will bring, my experience has been that the biggest detriment to FI for most people is being too conservative.

 

[YellowSubmarine]

At 73, my portfolio is somewhat inverted to the 60/40. I loaded up on bonds while the rates were high. Many of the bonds are maturing and I expect a slight shift in my paradigm. Currently those bonds are up very nicely but replacing them with comparable returns is unlikely. So, it's back to equities as time rolls. Here's my allocations. I am very content with it:

 

[fognostic]

Hello. ER.org has been my go-to source for investment advice for a long time, so I have a question for the financial gurus here. I would appreciate your input. For context, I'm a 64 year old man who is 6 years into retirement. I hold low-cost index funds in Vanguard and Fidelity with a 65/35 asset allocation split.

I have heard negative talk about bonds and the traditional 60/40 AA split. Specifically, I've heard that holding 40% bonds is a poor diversification strategy. The "experts" cited in the video below recommend something more like 60/20/20, with 20% going to gold, real estate, or something else that provides a better hedge on inflation than bonds. They say the 60/40 guideline worked well in the past but is a poor strategy now.

I am aware that "expert" advice can be found all over the map, and that experts often get it wrong. On the one hand, I don't want to be blown about by changing winds, but on the other, I don't want to have 35% in bonds if half that money ought to be sitting elsewhere.

Let me know what you think, please. I've always thought the ER roundtable was pretty solid.


"The 60/40 Investing Rule is Dead; Here is What is Replacing It:"

FWIW, I just retired at age 56 and dropped our stock allocation to 60/40 to hedge sequence of return risk. We plan to increase stocks toward 80/20 over the next 7 to 8 years as we approach healthcare expenses dropping (Medicare) and SS providing a guaranteed base income at age 67. Credit where due to Karsten Jeske for this idea (SWR 19 and SWR 20).

We've noticed we have been missing out on recent market and gold gains too. I've had similar thoughts as you (bump up stock allocation more than our reverse glide path plan, replace 10% bonds with alternative investments), but we're sticking with the plan. Not interested in buying high today hoping things rocket higher, because we've already won the game and don't need to take those kind of chances this early in our retirement.

Everything depends on your unique situation. In general, I think the more your expenses are below your safe withdrawal rate and the lower the fraction of your expenses covered by investment income versus guaranteed income streams, the more risk your investments can withstand. I didn't view the video you linked, but I'll bet considering this as a pre-requisite wasn't in it.

I don't think 65/35 is a terrible place for you to be at age 64. FIRECalc is a good tool for investigating how stock allocation affects outcome. It's convinced me the difference between 65/35 and 75/25 isn't going to make or break retirment. Karsten Jeske offers a much more detailed Google Sheet tool that includes modeling gold and international stocks in the investment portfolio - you might give that a try if you'd like to examine historical inclusion of gold in your portfolio. For the simpler scenarios FIRECalc handles, I've found both tools get essentially the same answer.

 

[target2019]

Appreciate the input, folks. I was concerned that I might be too heavy in bonds and too light in something that might provide better diversification and protection. But I'm not hearing any support for that idea here.

I listened to the video. I grade it as very poor advice. He's packaging Fear-Uncertainty-Doubt to get you to buy his book.

I listen to some of the sources he quotes, but stacking narrative upon narrative doesn't provide me with confidence.

As other(s) say, intermediate bond fund is one way, but examining how you decumulate may lead to some CD-MMF-etc. holdings.

I hear the gold-crypto mantra, and it's interesting, but I'm not ready to follow an unknown quantity on youtube. I need to perform my own study and research.

If JPM and other big banks quoted by mr. tuber are buying gold, do I need to replicate what they are doing? After all, I have significant allocation to the finance industry through U.S. and int'l equity funds.

 

[Al18]

I think a lot of retired users on this forum have a large percentage of their investments in Vanguard Wellington VWELX or Fidelity Balanced FBALX. These are both 60/40 funds who have been around 39+ years and shown impressive growth while smoothing out the bumps of a 100% stock portfolio. Over the past 10 years, VWELX has averaged 10.11% growth per year and FBALX has averaged 11.22% growth per year.

 

[ER Eddie]

Read Buffet’s opinion of gold.

Good tip. I did. I trust his advice.

I don't think 65/35 is a terrible place for you to be at age 64. FIRECalc is a good tool for investigating how stock allocation affects outcome. It's convinced me the difference between 65/35 and 75/25 isn't going to make or break retirment. Karsten Jeske offers a much more detailed Google Sheet tool that includes modeling gold and international stocks in the investment portfolio - you might give that a try if you'd like to examine historical inclusion of gold in your portfolio. For the simpler scenarios FIRECalc handles, I've found both tools get essentially the same answer.

My 65/35 allocation has been doing really well, so I'm going to let it be.

Iirc, the consensus here at er.org was that asset allocations anywhere between about 40/60 and 80/20 should work out fine.

I may let mine drift toward 70/30 rather than rebalance as I usually do, but I won't do any major fiddling.

I listened to the video. I grade it as very poor advice. He's packaging Fear-Uncertainty-Doubt to get you to buy his book.

I listen to some of the sources he quotes, but stacking narrative upon narrative doesn't provide me with confidence.

.... If JPM and other big banks quoted by mr. tuber are buying gold, do I need to replicate what they are doing? After all, I have significant allocation to the finance industry through U.S. and int'l equity funds.

I appreciate you watching and addressing the content of the video. Thanks.

Good point at the end. I hadn't thought of that.