Book Appointment

Is The 60/40 Portfolio and 4% Rule dead? [Part 2 of 2]

Season #2

We were talking about the 60 40 portfolio. If it was dead or not what do you do during the retirement years? How do you make adjustments and changes as the economy continues to shift and change? When we were together last week, we were talking about the 60 40 portfolio. We're wondering if it was dead or not, and as a thumbnail, what is a 60 40 portfolio and where does it stand right now?

What is the 60/40 portfolio?

So the 60 40 portfolio is this ideal portfolio that has been held up as if you had an allocation and you allocated your money, 60% of it to, stocks and equities and things that had ownership in a company. And then you allocated the remainder of your money, 40% to. Things that were safer, right? That didn't have as much volatility as stocks like bonds.

Then in theory have a very stable portfolio that would produce the returns that you need over the lifetime of your retirement.

What does the 60/40 portfolio have to do with the 4% rule?

And this goes along with that 4% rule that in theory, you shouldn't run outta money in retirement or you'll have enough money to live off of and not really worry about a change in lifestyle.

And so it's heralded as the, word looked upon as the ideal middle of the road portfolio for retirees.

Bonds or Bond Funds?

I see. And when we were also talking, we got into the discussion about bonds as stocks and bonds, and one could come away with the impression that you're not in favor of individual bonds.

So I actually am I love individual bonds.

I just think that very few people know how to buy them or actually are invested in them. And let's talk about that, right? So an individual bond, I'm loaning an individual company money. And when I do that there's the terms of the loan. Just like when you got a mortgage on your house, right?

That you got it for 30 years, right? Or 15 years. And there was a certain amount of interest and hopefully it was a fixed rate of. And so you had this payment that you were making on a regular basis to the bank, and everyone, all parties involved, knew what the terms were. Right? And if you didn't pay them, the bank had the right to foreclose on you and collect from your assets and in this case that your house, but they could also come after other stuff that they wanted to and they could repay that loan. And that's fundamentally how loans work, right?

And bonds are just the same thing, but to corporation.

Now here's the interesting thing about bonds, is that if I get a mortgage from the bank I can't, then sell that.That's not assignable to my friend, right? My friend wants to buy my house. I can't have him just take over my mortgage most of the time. The bank doesn't allow that.

However, with a bond, right? I can just sell that to anybody. Anybody can come up to me and say, I wanna buy your bond, and then we can negotiate a price and I can sell it.

What happens to bonds when interest rates change?

So here's the interesting thing that happens is when interest rates start changing, people start negotiating. And, you usually end up having to give up. You sell it for a lower price than you paid for in order to get that return, right? Now here is where it gets. It gets really crazy, right?

Is that's fine and good. You loan a company money, you get your principal at the end, you get your interest while they hold onto your money. You're good. You're golden, right? I think that's great. There's, there are individual risks, but those can be managed if you go out and buy and do your research.

But most people were like we don't wanna do that. We don't have the time, we don't have the resources. We don't have the connections. We don't wanna research a million different companies to find who's got the best bond.

The Dark Side of Bond Funds...

Instead, we outsourced it to companies, and you got these ETF companies and mutual fund companies, and these bond companies, these bond funds, where they aggregate all this together and they say, You can't pick the best bond, so we're gonna get, 30 of them or a hundred of them, and we're gonna pick it from all these companies and we're gonna do that selection for you.

We're gonna deal with the buy, buying and selling of them. . And we're gonna target a certain return.

Now here's the problem, right?

The best thing about a bond, the thing that makes it less risky than equities is that you get your principle. But you only get your principal back if you hold onto the loan until maturity, until the loan terms come due.

And the person who you loan the money back, your money too, gives you your money back until that day comes. You could, all you could do is sell it to someone else. And that's what these bonds bond fund do do. Very rarely are they, holding them until maturity. Most of the time they're just buying and selling them to try to get a, a certain return.

So in that regard, it's no different than equities, right? It's no different than day trading stocks to try to get a return. You're just doing it with a different instrument and you're calling it less risky because it's something that has characteristics that would be less risky if you used it the way it's supposed to be.

But the truth is a bond fund should be treated no differently than an equity fund, really no differently. In fact, it probably has more risk than equity cause less people are trading it.

Is there an alternative to Bonds?

So is there an alternative to the classic mainstay equity, if you will, a fixed income mix? We've been used to for eons I'll just say since the nineties, as you mentioned in our last episode.

Is there an alternative to that?

So I'm gonna answer your question in two parts. So first I'm gonna say the first question is, are there alternatives to, bonds and bond funds? Is there something else that you can do that has that same safety that we've been told? Bonds are that they very clearly are not right or that they're very hard to access.

And the truth is that yes, there are alternatives, there are other ways of getting that same safety of. A guaranteed return or getting a, a more, less, a less volatile return with principal protection. Cause that's the primary reason why we go into bonds is that we don't wanna lose money.

 Or we don't wanna risk all of our money in order to get that return. And so there are very much alternatives to that. Some examples. You probably heard, because I'm sure that everyone listening has gotten pitch this is some kind of insurance or annuity contract. Yes, those are the big, alternatives.

Bank CDs

You also have bank CDs. Bank CDs for a long time couldn't give good returns. There's equity link CDs, but with interest rates on the rise, those are now a possibility. There are also all kinds of contracts like options. Exchange trade in notes and structured products, and there's all kinds of things that you can do where you can simulate that same kind of behavior.

The behavior of, I want to participate in the market, but I don't want to take on full equity risk. I don't wanna risk losing all my money. And there are, for every scenario that you can think of, there is someone on the other side who's willing to take that contract. So for instance, right now my firm is doing a lot of business with something.

Buffer notes and UITS,

which are essentially what they'll do is this other company, like an insurance company, like an investment bank, they will say, okay, we will give you up to 20%. We will give you up to 20% of the upside of the market, but on the downside, we are going to eat the first 10% or the first 20%.

So you, it mimics that same kind of behavior that you. Not to the same degree that a bond is, not to the same degree that an annuity has, but it gives you that similar type of ability without having to put the same kind of risks or the same kind of limitations that you have with annuity contracts or that you have with bonds.

Is There an Alternative to the 60/40 Portfolio?

So there are definitely alternatives. Now, to answer your question of, 60 40, is there an alternative of 60 40? I would argue you should have never done the 60 40. That the 60 40 was just a hypothetical concept that we came up with that basically said, take one asset class that, will, that's a long term asset class that will go up over time and then take another one that has less volatility and more secure.

Combine them together, right? So that we have the type of stability and the type of risk that we want for our. And I think that it's a job of every financial advisor, every money manager. Our job is to make sure that we can read the tea leaves, that we look at the data and we create for you a portfolio that does what you want it to do.

And you have different building blocks that you can build with equities and fixed income are just two of the building blocks. But you should use the different building blocks to create the experience that your clients want, that the people wanna have, right? And every person is individual in what they want that experience to be.

Both subjectively and objectively, right? Subjectively, I don't wanna wake up and see that, I've lost you 20, $30,000 or whatever that number is, right? My wife has a different concept of what conservative to her means to her, and we want to create an experience that works, right? And so for every person, that should be something unique.

And then you have the objective, right? Objectively, I need to have a certain amount of money to maintain my lifestyle. I need to have enough. I need to make my assets grow a certain amount so that I don't run outta money in retirement. And we need to find a balance between those two so that we have the retirement, that we have, the investments in the portfolio that we can live with, that we can sleep with at night.

That doesn't keep us up or, like the sleep mattress thing that, if I'm comfortable, my wife is also comfortable. Not that she's, it's at her expense that, okay, I get to sleep at night, but she's, up at night all all night because she's worried about the risks that we're taking on.

I think, that is my take on the 60 40 and how I think you should address it. So

what do you do during the retirement years? How do you make adjustments and changes as the economy continues to shift and


Create Layers of Protection

So I think that there are two fundamental concepts that I really like employing.

The first is what I call layers of protection, right? So we can't predict the future. I, I spend my life, looking at the data to try to predict the future. But ultimately at the end of the day, we don't have a crystal ball. It's gonna be a hundred percent correct. We don't have a crystal ball that was gonna tell us, that Russia was gonna invade Ukraine or that Ukraine would be able to withstand it.

No one thought that would happen, but yet that's the world that we live in.  The consequences of that, with the, Russia cutting off gas to Europe and now Europe actually looking at the potential that they may have people going cold during the winter and they're trying to figure out to survive.

That's something that no one could have predicted, right? These events will happen and they happen on a fairly regular basis. So what we need is layers of protection, and that's number one. So we need to have things that aren't really correlated with each other, that will provide us protection so that if one of our layers of protection fail, the other one will work for us.

People, a lot of people think that the 60 40 provided that layer of protection, that you had equities and you had bonds and they don't work together. So therefore they're their same protection. They offer protection, but that's not the case when you know that they're gonna both have things happening at the same time.

We knew interest rates were gonna go up and we know that the Fed is trying to, rig on a correct. Because there's been basically too much money in the economy which is inflation. So we have those things that we knew they were gonna come. So that's another thing that's part two is you gotta read the tea leaves and say, okay, the longstanding beliefs that we had are changing the future is not gonna look like the past.

The Future Will Not Look Like the Past

And so we need to make sure that the assumptions we have in our portfolio and the investments that we're doing are forward looking, not backwards looking. Lots of advisors will give you these reports and these analysis and they'll say look at how I did over the last 20 years. Great. How will you do over the next 20 years?

That's my question. I don't care about the last 20 years. I know what happened, right? I lived it. Now what's gonna happen in the future? That is the real question. We need to be able to survive what's coming tomorrow. And don't tell me that tomorrow's gonna look like the best. 20 years ago I didn't have an iPhone.

I didn't have a computer that I can put in my pocket. I didn't even dream that I would be able to have something that powerful. But that's the reality we live in, that we have kids who can't put down their damn phones. And that they don't like talking to people. You told me that 20 years ago, I wouldn't have believe.

That's the truth. That's our reality today. And you're telling this is a great case for living with financial anxiety. How can we get more information?

So if you go to my website, yields for, I've got classes, I've got guides, I've got resources. And of course if you want, attend one of our upcoming classes or if you just wanna talk to me or one of my team members, go ahead, book an appointment.

We're more than happy to take a look at what you have going on, answer any questions you have. This is just something that we do for the community to help you guys retire and stay retired and live the life of your dreams.

It's interesting you said something about reading the tea leaves and in closing.

Do you think it'll snow tomorrow in new?

If we go with the accuracy of the of the weather for forecasters, right? It's what they're right. Less than 50% of the time. Listen, I think I'd do a better job than that, but there, I have no idea. ,