The traditional 60/40 portfolio may not deliver much in returns going forward, according to a recent study.
What is the traditional 60/40 portfolio?
20+ years ago, well before my financial advisor days, when I started putting money into my first job’s 401k, I knew next to nothing about investing. So I did some very basic reading about traditional portfolio construction available on the 401k website.
I remember clearly the pie charts, showing ages and corresponding percentages of portfolios that should be allocated to bonds (considered less risky investment choices), and percentages allocated to stocks (considered more risky investment choices). It seemed relatively simple – choose my age, then choose the associated percentages in stocks and bonds. All these years later I can’t remember exactly what I chose, but I’m pretty sure it was some variation of the 60/40 split: 60% of the portfolio allocated to stocks, and 40% of the portfolio allocated to bonds.
A recent study indicates that a 60/40 portfolio may see “miniscule” returns going forward.
A recent study by Rob Arnott (link opens in new tab) concludes that a typical 60/40 portfolio may see miniscule returns going forward, resulting in a lost decade. According to the article, “a traditional 60-40 portfolio is likely to deliver somewhere between zero and 1% over the next decade, a period when all baby boomers will have reached normal retirement age.”
The article continues: “Ten-year returns for bonds should come in somewhere around -0.5%, he said. Put that together with a 0.5% return for stocks and a 60-40 just manages to eke out a positive real return.”
If he’s right, and a 60/40 portfolio returns somewhere between 0-1%, this type of portfolio may not even keep up with inflation – meaning that at the end of the 10 year period, this type of portfolio could actually have less spending power than it does today.
The potential of active management
In contrast, active investment management doesn’t typically select a static percentage in stocks and another percentage in bonds. Active investment management often includes regularly evaluating a portfolio, potentially making changes to investment allocations in search of better returns.
Tree Fort Financial has a proprietary investment methodology (link opens in new tab) that has delivered returns before fees beating a benchmark since inception 2003. Past results are no indication of future returns. See specific returns and accompanying disclaimers here (link opens in new tab).