Why is a 60/40 Portfolio the Preferred Solution for Most Retirees? by Scott Stolz (week 24)

 

My weekly Barron’s Retirement email pointed out that a 60/40 investor that has not rebalanced since 2020 could now have a 76/24 portfolio due to the strong equity markets over that period.  It went on to say “…that’s probably too much risk for many retired investors.”  It of course suggested that retirees in this situation replace some of their equity positions with bonds in order to get back to the commonly used 60/40 portfolio.  That made me wonder how did a 60% equity (U.S. and global stocks) and 40% bond portfolio become the standard for most clients.  So, I asked the expert – ChatGPT.  I found ChatGPT’s answer to be very thorough and comprehensive, but it mostly came down to this part of the answer:

The 60/40 portfolio has delivered:

• Solid long-term returns
• Lower volatility than all-stock portfolios
• Smaller drawdowns in most market crises

For example, over the past 50+ years, the 60/40 has produced 6–8% average annual returns depending on the time period.

It’s been “good enough” for many investors, especially retirees or pre-retirees who want growth and downside risk protection (my emphasis added)

I would also add that since it is such a commonly used approach, it also protects the advisor from most regulatory or legal actions.  Therefore, it’s a risk adverse approach for both the client and the advisor.

Now before I go on, I should disclose the fact that I have never bought a bond in my life and I likely never will.  But don’t get me wrong.  I’m not advocating for a 100% equity portfolio.  I stopped that approach at about the time I turned 50.  A severe market downturn in the first few years after retirement (otherwise known as sequence of return risk) is a very real risk to any retirement portfolio.  I just think there is a better way to mitigate this risk.  And that’s why I’ve added a significant amount of guaranteed retirement income to my portfolio.  Since I know all of my essential expenses (and then some) are going to be covered by the income I will get from social security and my annuities regardless of what happens to stock prices, I’m comfortable with a higher equity allocation.  In fact, the rest of my retirement assets are typically 100% equities.

As ChatGPT correctly stated, advisors add bonds to portfolios to reduce the chances that a retirement portfolio is too severely damaged by bear markets such as 2000-02 and 2007-09.  If I’m making withdrawals from my portfolio to cover my expenses in retirement, a large drop in value combined with those withdrawals can blow up a retirement income plan.  But, if I don’t need to make those withdrawals, I have the luxury of waiting for stock prices to recover. 

Now the reality is that I actually do have a 60/40 portfolio.  I just don’t have a conventional one.  If I were to value my lifetime income in terms of a dollar amount today (net present value), it would be a significant sum – probably at least 2/3 of the rest of my retirement portfolio.

Where I think many advisors miss the boat, is that they sometimes try and keep a 60/40 portfolio even if there is a significant amount of guaranteed lifetime income.  I would suggest this is not necessary.  Of course, the regulators and plaintiff’s attorneys might not see it that way, which might partly explain why most of the industry sticks with an investment approach that was designed long before many of today’s investment vehicles became available.