In this month’s edition of “Money Matters,” Scott discusses the 60/40 investment strategy, how this type of investment strategy has performed over time, and if the 60/40 investment strategy still offers a viable plan for financial investment success.

Transcript: Is the 60/40 Investment Strategy Dead?

0:00:00.1 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals. And Scott's joining us now by phone. Welcome, Scott.

0:00:24.7 Scott Oeth: Good morning, CJ.

0:00:25.7 CJ: Good morning to you. So, you wanted to talk about an investment strategy called the 60/40 portfolio. What is that exactly?

0:00:35.4 SO: Yeah. Some interesting things to talk about here, and I just want to say upfront since we're talking about investments, we need to make sure we point out everyone's situation is unique, their own financial plan and preferences. So, nothing here should be taken as individualized advice. Listeners, of course, as always need to do their own research and seek their own expert counsel. But what is the 60/40 portfolio? I imagine a lot of people probably heard of it, is a long running investment strategy. And you and I have talked about the benefits of diversification many times, aiming to spread investment risk, seeking to capture a wide array of investment opportunities. And ideally having offsetting patterns of returns to smooth out the investor experience.

0:01:18.9 SO: So, the 60/40 portfolio strategy very simply is one where when you hold 60% invested in stocks, which are fractional ownerships of businesses, and 40% is invested in bonds. And bonds are where you're lending money out to companies and governments, and they're promising to pay you back, they're paying you interest. So, this 60/40 portfolio approach is, CJ, it's performed well for many individual investors offering solid returns and is often significantly much lower-level volatility than pure stock portfolio. And it's also, I think, interesting, a very common investment target for large pension plans and endowments that are managed by very serious, well-trained investment professionals. And the mix, when it's working well, provides interest income from bond payments, dividends from the stocks, and over time, you'd expect to have capital appreciation, that price rise from stocks as well. But the thing is, in 2022, we had a very unique year.

0:02:17.8 SO: It was a down year for stocks, and it was really a historically bad year for bonds due to the rapidly rising interest rates, something you and I talked about quite a bit. We had inflation at hand, really rapidly rising costs, and so, interest rates are pushed up to try and put the brakes on the economy. And this caused stocks and bonds to really move in tandem, which they don't always do, and to move downward big time. So, the 60/40 portfolio actually delivered considerable losses in 2022, and it led many industry commentators to proclaim that the 60/40 portfolio was dead.

0:02:51.3 CJ: Well, is it?

0:02:53.4 SO: Is it? Yeah. So, interesting, I couldn't help calling to mind, and I had to look it up. Mark Twain is said to have read his own obituary and made one of his Mark Twain-type remarks and said, the reports of my death are greatly exaggerated. And I think that's really the case with the 60/40 portfolio. Yes, 2022 was a bad year, but still, investors holding that portfolio fared better than an all-stock portfolio. But it was a tough time because interest rates have been very low, so bonds were not contributing much in terms of interest. And what we in the investment world call the correlation, the movement of stocks and bonds got very close together. They both dropped, and so it didn't offer as much downside protection as we'd hoped. But CJ, over longer periods of time, this asset mix has performed quite well, and I think there's a lot of reason to expect that it would in the future.

0:03:47.5 SO: John Hancock Asset Management, I pulled up some figures that they had. They said the 60/40 portfolio has delivered a 9.4% average annual return over the last five decades, and this is only slightly below the S&P 500. The pure stock index is 10.9% average return, but with much lower volatility. So that sounds pretty good. And Thornburg Investments had some statistics. They said in the 42 years from 1980 to 2022, the 60/40 portfolio was flat in only two years. It was up 30 years, and it was down six years. Pretty good skew towards the upside, and so, it says investors who relied upon this investment mix have seen their portfolios increase in value 81% of the time. Not every year, but eight out of ten years, you're seeing a positive return with that mix. So historically, it's done well because of that diversification benefit. Stocks and bonds don't always move up and down at the same time, and they're both contributing important components.

0:04:50.1 SO: I think for me, CJ, there's one other piece that was really sort of highlighted, and this is something for listeners and individual investors, I think, to be wary of, and that is product sales agenda. So, product manufacturers in this place big Wall Street investment companies or wherever they reside, they're always looking to capitalize on a trend. They're looking for something new and exciting to package a product that's going to capture investor interest or capitalize on investor fears.

0:05:19.6 SO: So, if you follow the money trail, a lot of the people that were saying the 60/40 portfolio was dead, they were really promoting their what you might call alternative investment products. Often, they have very high fees embedded things like private equity and hedge funds and private lending and private real estate and cryptocurrency and saying you need to add these components to a portfolio because that classic 60/40 portfolio mix, which really has done great things over long periods of time, is dead, and I think that's... I look at that with quite a bit of skepticism.

0:05:51.9 CJ: Is the biggest advantage to the 60/40 the lessening of volatility or is it a good approach for everyone? Some people who are closer to retirement or people who can leave their money in the market much longer, what would you say to that?

0:06:07.5 SO: Well, I think the advantages are that it offers... It has offered an attractive return over the long haul. Those dividends coming in from the stock side are meaningful, and, at this point, in time, especially with higher interest rate environments, that 40% weighting give or take to bonds is really going to generate a reasonable interest income. And then, yeah, we still expect stocks to go up. Not every year. We know that doesn't happen, but over long periods of time, it's been pretty impressive, the gains that come from the stock portfolio. So attractive returns with a significantly dampened volatility smoothing out the ride, which can help the investor experience from a comfort standpoint, but also it can really help with just overall wealth accumulation by not having to recover from such significant losses.

0:06:54.7 SO: So, some real significant advantages there. Is it a good approach for everyone? I think it's a very good universal approach, CJ, but no, it's not for everyone. Like you said at the beginning, people have different considerations. They have different goals. Someone's a longer time horizon or if this is excess capital that they don't really need in the short run, they might really want to shift it up a gear step on the gas, so to speak and maybe have 80% stocks, maybe 90% stocks, and be willing to accept more uncertainty and more volatility for the expectation of higher long-term returns. Or someone who's truly very conservative or if it's a very near-term need. Yeah, this money is in the short term, they might want to dial back to a more conservative stance. But I think it's a reasonable starting point for discussions in terms of what's the right asset allocation.

0:07:46.7 SO: John Bogle, who founded Vanguard, one the world's largest investment companies, was really a champion of the individual investor and low-cost investing. In his later years, he was said to have a 50% stock, 50% bond portfolio, and I remember a quote where he said, "With that mix, I spend about half my time wishing I had more in stocks. About half my time, wishing I had more in bonds." But it did fairly well over the long time, but Bogle lived a long time—he was pretty advanced years—and I think knowing that stocks do tend to have much more up years than down years, we just don't know the exact sequence. Having a bit more of that lean toward stocks probably makes sense for most people, and, CJ, sometimes I describe it this way, too: we say, if someone says, do you like the 60/40 portfolio, it's kind of like saying, CJ, do you want a sandwich?

0:08:39.9 CJ: Maybe.

0:08:40.2 SO: Well, maybe. Exactly. Maybe, what are we talking about here? Turkey, roast beef, peanut butter, what type of bread, is there going to be lettuce and tomatoes? What kind of toppings? Do you like mustard or not? I think there's probably, I forget the math equation, but I'm sure there's essentially limitless sandwich combinations. And it's the same thing. So, broadly saying 60% stock, 40% bonds, okay, that's a nice starting point for a lot of people. Maybe we lean a bit more towards stock or a bit more towards bond, but there's also a huge consideration in terms of what are those components, just like how you are building that sandwich.

0:09:11.4 SO: Are we just talking about S&P 500 stocks, or really significantly, are we going to add some international stocks or smaller company stocks. Are we going to think about tilting towards value and profitability? Are we going to add a slice of commercial real estate holdings? And same thing in the bond side. So, there can be significant difference in what's actually delivered to the bottom line in terms of how that 60/40 investment sandwich is put together.

0:09:39.2 CJ: Sounds like a lot of research is in store and decide what your comfort level is with risk at the stage of life that you happen to be in.

0:09:49.8 SO: Exactly.

0:09:50.6 CJ: Scott, that's a lot of really good information. If folks want to get a little deeper into it, do you have some information on your website?

0:09:58.5 SO: Yes, yes, we have lots there. So, scottoeth.com. I post these sessions. I know you have them on the WTIP site as well and I share a lot of my own writings and research and just interesting findings from around the web, I think are useful for investors there. So, that's a great starting point and it's always fun to get a call at the office, but a few people have reached out to me from these episodes. So, always happy to talk.

0:10:26.0 CJ: Well, Scott, thank you so much for taking time to share your information with us. We really appreciate it.

0:10:31.7 SO: Thanks, CJ.