Did your 60/40 insurance policy pay out?

Many advisors and investors operate by the “rule of thumb” whereby you subtract your age from 100, and that’s how you decide your asset allocation. This means for a 40 year old, they would be in 60% stocks and 40% bonds, often long-dated treasuries as a recession “insurance policy.” For some, however, their goals and investment objectives may dictate a 60/40 allocation.

Other advisors require you to fill out a risk-tolerance questionaire (RTQ), which essentially has the client choose their asset allocation. If the RTQ test results comes back as “60/40” guess what portfolio that advisor is suggesting as your asset allocation?

So how did that 60/40 portfolio do?

According to a report by Bank of America Global Research, a 60/40 portfolio invested on March 9, 2009 in  a 60% equity / 40% bond portfolio. During the 11-year market cycle that began on March 9, 2009 and ended on March 23, 2020, an all-equity portfolio returned 316%. A 60/40 portfolio returned 236%.

Said differently, a $100,000 portfolio turned into a nice $316,000, while a 60/40 portfolio turned into a modest $236,000. That difference amounts to a cost of 7.24% average annualized return (per year), and a total of $80,000 over the market cycle. Ouch. This also assumes no contributions or withdrawals were made to this portfolio. It additionally assumes that an investor is disciplined enough not to pull their money out during the 7 corrections of 10-20% we had along the way during the 2009-2020 bull market.

For a retiree, this may be the difference between paying for healthcare costs alone, or worse, having to reduce their income or risk running out of money. For someone in their 40’s, the compounding lost (opportunity cost) on their portfolio could mean the difference between having to increase their contributions just to sustain the same quality of life come retirement, push back retirement, or risk a retirement shortfall.

AN EQUITY PORTFOLIO WITH 40% EXPOSURE TO FIXED-INCOME

Working with your advisor on a goals-based approach to retirement investing will help ensure your portfolio is in-line with your needs, and it also helps take emotions out of the investment decision-making process. Making retirement investment decisions are arguably some of the largest and most important you will ever make, so make sure it’s rooted in sound logic and not on an arbitrary rule(s)-of-thumb, or fear of the next recession.