Is a 60 40 portfolio still good?

by | Apr 21, 2023 | Podcasts

Is a 60 40 portfolio still good?

This question has been coming up frequently.  All throughout 2022, people were told by the financial media that the old 60/40 approach to investing was dead. Is it dead – or did it simply have a a bad year?   After all, this is historically how many large pension assets are still managed.

While Tim and Tom discuss (and dunk on) how the media trashed the 60/40 approach to investing, this is (yet) another good example of how the financial media will plant seeds of doubt in your mind. The media does a good job convincing people they “are doing something wrong” with their investments, and should make a change.

When, in fact, folks may actually be doing what is right all along!

And be sure to listen to the end, because Tim and Tom discuss why yanking money out of bond funds and bond ETFs while they’re down, may not be a wise decision.

Thanks for listening to podcast episode #439, and be sure to subscribe to the Mullooly Asset Management podcast wherever you tune in to your favorite shows.  You can also find all of our previous Mullooly Asset Management podcasts here.

Please enjoy 17 minutes of delight while we discuss the 60/40 model and bond investing!

Time Stamps for “Is a 60 40 Portfolio Still Good?”
0:45 – What does “60/40” mean?
3:30 – Will you be attending the funeral for 60 40?
4:57 – The resurrection. The 60 40 portfolio still good.
6:10 – Talking Your Book / Selling your story
8:30 – “…if the market stabilizes…”
11:24 – How bond funds and bond ETF’s behave
14:00 – Bond funds have changed over time

Link to WSJ article. (Wall Street Journal has a paywall, sorry)

Transcript for Is a 60 40 portfolio still good?

Tim: Welcome back to the Mullooly Asset Management Podcast.
Tom: Wow. Just like that?
Tim: We’re jumping right in. This is Tim Mullooly.  And as you heard, Tom is here with me today.
Tom: Hello.
Tim: So we’ve got an article from the Wall Street Journal that we want to talk about.
Tom: No, we want to dunk on it.

Tim: Well breaking news, the 60 40 investment strategy…it’s back! It is back with a vengeance. So I can’t even count the amount of headlines over the last 12, 15 months or so that they were, you know, scheduling a funeral date for the 60 40 portfolio. That thing is dead. It’s gone and it’s never coming back.

Tom: Before we continue with the slam dunk on, on this whole theme, can you just for our listeners, just quickly explain what the 60 40, what that phrase means? Because it’s a little bit “jargon-y” for our industry.

Tim: Just on a very high basic level, 60 40 portfolio, 60/40 investment strategy is a portfolio where you have 60% of your money allocated to stocks, the stock market; and 40% of your money allocated to the bond market. So a slight tilt towards the stock side of things. Historically, it’s been a pretty popular — I don’t wanna say default allocation for a lot of folks — but some people use it as a default allocation if they don’t know what allocation they want to land on – if they haven’t done any sort of planning work.

Tom: Going, taking a walk down memory lane, the 60 40 approach was THE model through most of the 1980s and into the 90s because you came out of a period of high inflation in the 70s and then into the early ’80s. And we got to a point where we were getting good coupon returns on bonds. We were getting 4-5-6% on short term bonds. We were getting 6-7-8% on intermediate term bonds. High yield bonds traded like stocks – where you could get double digit returns. And then you had stocks. So you got “income” from your fixed income portfolio. And so you didn’t have to put 100% of your money into stocks to recognize some kind of return. And even when you had a so-so year in the market, you got bailed out because you got some dividends from stocks, and you also got the income from the bond and cash side of the portfolio.

Tim: And even taking out any sort of return from the bond side, if the stocks were having a a bad year, your account weren’t doing as poorly than as if you were 100% in the market. So it adds that diversification there on top of the higher coupons and interest and yield that you were getting from the bond side of the account.

Tom: I’ll also add that if you were to drill down into the portfolios of many, many, many large pension plans across the United States, you will see a 60/40 model.

Tim: So a a lot of people utilized that investment strategy. But, unfortunately, it died last year. Very sad. I say that jokingly, but it was definitely a rough year for the 60/40 portfolio. It was a rough year if you had a 100% stock portfolio or if you had a 100% bond portfolio. So it was one of those outlier years where stocks were down, and bonds were down too because interest rates were rising, your bond prices were falling. Um, the yields hadn’t really caught up to get to give you the, the income that you needed from your bonds. So it was a really difficult year for the 60/40. And as they always do, the media kind of sensationalized it and turned it into the “death of the 60 40 portfolio.” And, it’s “time to move on. There are better alternatives out there!” And now we’re quickly backpedaling on that, in less than a year.

Tom: Well, not “we.”

Tim: Right!

Tom: Before you get to that, I’m going to throw in that famous quote from Mark Twain, “Reports of my demise have been greatly exaggerated.”

Tim: Reports of the 60/40’s demise were greatly exaggerated. I took some notes on the article. The first one just says “not dead?” And then “ripping up the script is a bad idea… wait!” So I, it was getting a little snippy with my comments. But I guess in good fun, in a sense. This article was talking about how the 60/40 portfolio is off to a really good start this year. And that some people, they outlined some profiles of investors, who they interviewed saying that they’re happy they didn’t jump ship last year — you know — sell out of their 60/40 portfolio. Because now things are coming back, on the way up. And the way to participate and have your account recover is to keep the script intact and not bail out of it when things are getting tough.

Tom: We’re gonna have a rough year from time to time. That also can be said, not just for stocks, but for bonds. And last year was probably the worst I’ve seen in my career going back to the mid-’80’s.

Tim: And definitely my career.

Tom: I’m not surprised to see headlines on all of the financial websites that you and I go to:
CNBC.
Marketwatch.
Wall Street Journal.
Barrons.
All of them. “60 40 is dead. What should you be doing?” You know what you should be doing? Turn off the computer, turn off the TV.

Tim: A lot of those folks that were writing those articles or, you know, participating in those segments on TV were most likely selling their own book. You know, you’re talking your own book when…

Tom: Can you just explain what that means?

Tim: Sure. So they have an agenda when they’re saying things like that. If the 60 40 portfolio is dead, what should you do instead? You should “look at this great thing that I do” or “…that my firm does” over here. So they want you to kind of pay attention to — what they’re doing by saying that, this well known battle-tested, investment strategy is dead. They get you to click on the headline and then they pitch you on the things that they want you to participate in.

Tom: Now, we’ve done episodes recently where we talked about what gold didn’t do – in the last 40 years, whenever we’ve had inflation. And we also talked about what inflation-protected investments – like TIPs – were supposed to do; but they didn’t.

Tim: Right.

Tom: Again, we’re getting bad advice from these different media sources that are telling us “you should look at these different alternatives, why are you still doing 60/40? That’s your dad’s portfolio!”

Tim: Right. Exactly. I think it also stems back to, in the last episode, we talked about the importance of having a plan, you know, in retirement…

Tom: …in the last episode? Tim, we talk about it in EVERY episode!

Tim: Yeah. Pretty much. That’s fair. Like I said before, though, this 60 40 sometimes tends to be a default allocation for people. I don’t think, I’m not saying that that should be what you do. I think your allocation should have some, some meat and potatoes behind it in terms of planning work and the reason WHY you have money in 60% in stocks, 40% in bonds. What’s the reasoning behind it?

Tom: Sure. Or why do you have 80% in stocks?
Right.
Tom: Whatever the allocation is.
Right.
Tom: There’s gotta be a reason for it.

Tim: Right. Because if there’s not a reason for it, when there’s a year where the stock market is down and the bond market is down, then yeah, maybe your 60/40 portfolio does feel dead — because there’s no backbone to it. There’s nothing to keep you grounded when things are going poorly. Luckily there were people in the article, like I said, that were able to hang in. There were other people in the article that said that, you know, there was a guy who’s in his mid sixties that he did bail out of his 60 40 portfolio. And it was quoted saying, if the market stabilizes, maybe I’ll consider going back to 60 40 portfolio.

Tom: Holy crap!

Tim: To him, I say, what does that mean? What does the market stabilize? What does a stabilized market look like to you?

Tom: Yeah. I don’t know what that looks like. And I’ve been doing this for a few decades now.

Tim: Right. I mean, if you look at the headlines from when the market bottomed — or when we started going back up at the end of last year. If you sat out from November, December of last year until now, you missed a pretty good quarter in the market. It’s not to say things are gonna continue on that trajectory for the rest of the year. But the point being that, nobody came out and waved the white flag saying “all right, selling is over, time to jump back in.”

Tom: There’s even more behind a statement like that. You know, hopefully this guy that you’re referring to, was doing all of these transactions in a retirement account, where he didn’t have to worry about taxes. Because if he did this in a regular investment account (brokerage account), that guy is unleashing taxes, capital gains, that he may have to report and pay taxes on. Then he’s gotta try and figure out “when do I get back in?”

Tim: Right.

Tom: So, define as you said, “stable,” a stable market.

Tim: Does the market stabilizing mean that you’re just gonna go in and buy all the positions back in at higher prices? Because that doesn’t sound like a good idea.

Tom: No.

Tim: That’s that’s the opposite of how you’re supposed to do things.

Tom: There’s something else because, you know, I’m thinking of folks who said, “Hey, I’m just gonna get rid of these bonds that I own,” and they took losses on them, “and I’m just gonna go into CDs.” You know, a CD is a stable investment. Technically, on a brokerage account statement, you’re gonna see a little bit of fluctuation in the price. Because they have to be sold back through a bidding process. So you’re never gonna get the face amount until the day of maturity. But, if you rode the bus downtown with bonds — and you’re not in bonds anymore — you have NO chance of making that money back.

Tim: Right.

Tom: You know, as the gains come back through the bond market. You threw that all away.

Tim: Yeah. The thing about bonds too, especially when prices go down, it usually means that interest rates are rising, which means yields are rising. Which means you’re gonna be getting more income from those bonds — as long as you hold them. Even in a sense that stocks don’t provide, IF you just hold on. Like, if, if the price appreciation on your bond drops eventually with the yield coming back to you, the income being paid from those bonds, you’re going to start making your money back even before the prices “start to stabilize.”

Tom: I don’t think this is really where we wanted this episode to go. But I think we need to just take a minute and talk about what happens with some of these bond funds and bond ETFs. When the yields go up like they did in 2022; we see the prices of these bonds get really squishy. They get really soft. They go down. And in some cases they go down more than they should. What is happening to the actual characteristics of a bond portfolio like that? They’re getting more cash flow. So even if nothing else happened, the yield — the current yield — on that bond portfolio goes up. Okay. Now, if it’s a short term bond fund — or even an intermediate term bond fund — they now have things that have been coming DUE through 2022 and into this year where now they are capturing higher and higher and higher yields. SO we’re now in a situation where some of these bond funds, ETFs, or bond mutual funds, actually have some pretty juicy yields and the OPPORTUNITY for some potential price appreciation as well. It reminds me of when I got into the markets in the mid-’80s. Where there were brokers all around me, pitching people on going into bond and bond funds. First of all, because they paid the broker a 6% commission, but more importantly, because the client had the opportunity to make 4-5-6% in yield PLUS the opportunity for some capital appreciation. Because as yields were going down, the prices were going back up.

Tim: Right? There’s more than one way to make money with bond investments. And, that to an extent doesn’t really exist on the stock side of things either. So even moreso, selling out of your bond funds in a time like last year after they got beaten down, it just didn’t make too much sense. Let alone all the discussion that we had about just having a game plan and realizing what the game plan is. And all of that set aside, like you’re talking about — the nuts and bolts of how bonds and bond funds work. The end of last year – or last year at any point, I don’t think was particularly the best time to be selling your bonds. That’s why, you know, you hold them and they end up working over time.

Tom: I will tell you that, twenty-five years ago, I was NOT a fan of bond funds. Because they just… Maybe, I was just too naive twenty-five and thirty years ago. I bought into the argument that, “well, I should just buy a bond and hold it to maturity.” But you get no diversification. You are pretty much “drawing a line in the sand” saying yields aren’t gonna get any better than where they are now – the day I’m buying this bond. And I have no control over where interest rates are going.

Tim: And that repurchasing power that you were talking about along the way. The bond funds are constantly doing that, with the bonds coming due. They buy more bonds at current interest rate prices, or interest rates. So yeah, I think potentially 20, 30 years ago, the types of bond funds out there were not as well run as they are. Like, bond ETFs were fairly new.

Tom: They weren’t even invented at that point. And so you’re talking about a bond mutual fund that had a sales charge, a load, built into it. Which created a huge drag on it. Plus we were only scratching the surface in the mid-90’s on the discussion about expenses in mutual funds. And so, honestly, those things were not good vehicles to be investing in.

Tim: Right.

Tom: Things have changed drastically! Along with the ETFs — and the lower cost structure that you’ll find with ETFs — in particular bond ETFs. But also the industry — and the public — are more tuned in to expenses and what things cost.

Tim: Yeah, definitely. You know, a little bit of a nuts and bolts discussion on the components of a 60 40 portfolio. And how the bond side of things work. All important to remember. And I think the overlying point of the article and what we’ve been talking about here is that the 60 40 portfolio is “back.” But it never really left — as long as you had a good reason for having your money in the 60 40 portfolio to begin with. It didn’t go anywhere. It didn’t die. It wasn’t reborn from the ashes. It was always there. All right. Well, that’s a good place to wrap up this episode of the podcast. Thanks for tuning in. We’ll get back to you on the next episode.

Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.

 

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