AA of 60/40 for your Lifetime?

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TVKNSC
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AA of 60/40 for your Lifetime?

Post by TVKNSC »

I am 37 y/o and have chosen 80/20 as my AA, which I am perfectly happy with. It seems like I have adopted the age minus 20 in bonds approach. Now onto the question: I understand everyone's investing situation can be different with how risky they can afford to be, but can a legitimate argument be made for anybody, at any age, to invest in a 60/40 portfolio? I just wonder if the long-term reward of a 90/10 or 80/20 is worth the risk. Is there any long-term data that suggests an all equity, 90/10, or 80/20 portfolio held for a long period has significantly better returns than a 60/40?
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
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retiredjg
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Re: AA of 60/40 for your Lifetime?

Post by retiredjg »

Don't know about any data, but it is my understanding that 60/40 used to be considered the sweet spot for most investors. I believe this was before it became common to start at a higher stock to bond ratio and migrate down over time.

It certainly makes sense to me, at least behaviorally. A younger person with an untested risk tolerance seems much less likely to do stupid stuff during a crash at 60/40 than at 90/10. Perhaps just "staying the course" at 60/40 during a person's early crash(es) is enough to make up for less return that would be associated with the higher stock to bond ratios.

However, I'm wondering if 60/40 is the best place for many people to be during retirement years. I'm thinking 50/50 or 40/60 might be more appropriate during withdrawal.
berntson
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Re: AA of 60/40 for your Lifetime?

Post by berntson »

The first article in the 2013 Credit Suisse Yearbook looks at the global returns on stocks, bonds, and risk-free bills since 1900. The authors estimate that the global equity risk premium was about 3% (i.e. stocks beat bonds globally by about 3%). So a 60/40 portfolio would have had annualized returns that were about 1% lower than the returns of a 100/0 portfolio.* Over the course of a 30 year investing career, losing 1% a year translates into losing 15%-20% in total returns. But of course, there are no guarantees. Over the last 30 years in the US, bonds have roughly kept up with stocks, so a 60/40 portfolio would not have lost very much compared to an all-stock portfolio.

[If portfolio returns were just a linear combination of the returns of their components, it would have been 1.2%. There was also likely a small rebalancing bonus for holding a 60/40 portfolio, so 1% is a reasonable guess.]
asif408
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Re: AA of 60/40 for your Lifetime?

Post by asif408 »

I think a legitimate argument could be made. It seems to me that the more you can save the less need their is to have a high allocation to stocks. I kind of wonder about individuals who have six figure salaries, can save 20%+ of their earnings annually, and still have 90-100% of their investments in stocks. To me, the idea is to preserve capital, then make it grow. Seems to me they don't need to take the risk because they will have more than enough money in retirement. Personally, if I was one of these individuals I would have a 60/40 or even 50/50 portfolio.

Personally I am not a fan of extremes in investing (or most other areas of life for that matter). From the research I've seen, there isn't much additional expected return to having more than 80% in stocks and greater risk. For an all bond portfolio, there is little additional risk to adding 20% stocks to an all bond portfolio, and a higher expected return. I like Benjamin Graham's advice to keep 25-75% of your portfolio in bonds.

I am 34 and have a 70/30 portfolio but I would be comfortable with a 60/40 as well. I would be less comfortable with an 80/20 portfolio and very uncomfortable with a 90/10 or 100/0 portfolio.
rkhusky
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Re: AA of 60/40 for your Lifetime?

Post by rkhusky »

Vanguard did some analysis on the subject:

https://personal.vanguard.com/us/insigh ... locations/

The more stocks you have, the better you do, but you have a higher chance for poor results. Risk vs. Reward. It appears fairly monotonic but I haven't plotted it out. If so, no sweet spot. (Best year seems to have a minimum at 40/60. Years with a loss has a minimum at 20/80)
Mike Scott
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Re: AA of 60/40 for your Lifetime?

Post by Mike Scott »

asif408 wrote:I think a legitimate argument could be made. It seems to me that the more you can save the less need their is to have a high allocation to stocks. I kind of wonder about individuals who have six figure salaries, can save 20%+ of their earnings annually, and still have 90-100% of their investments in stocks. To me, the idea is to preserve capital, then make it grow. Seems to me they don't need to take the risk because they will have more than enough money in retirement. Personally, if I was one of these individuals I would have a 60/40 or even 50/50 portfolio.

Personally I am not a fan of extremes in investing (or most other areas of life for that matter). From the research I've seen, there isn't much additional expected return to having more than 80% in stocks and greater risk. For an all bond portfolio, there is little additional risk to adding 20% stocks to an all bond portfolio, and a higher expected return. I like Benjamin Graham's advice to keep 25-75% of your portfolio in bonds.

I am 34 and have a 70/30 portfolio but I would be comfortable with a 60/40 as well. I would be less comfortable with an 80/20 portfolio and very uncomfortable with a 90/10 or 100/0 portfolio.
This, except that I will never see age 34 again.
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Re: AA of 60/40 for your Lifetime?

Post by tennisplyr »

I'm 64, retired and am at 50/50. My hope at least for the short term is to stay at that level, its seems like a reasonably happy medium.
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Dandy
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Re: AA of 60/40 for your Lifetime?

Post by Dandy »

There is no set it and forget it allocation that would apply to most. Need and ability to take risk vary widely among people and many times for each individual. A Target Date fund chosen at age 25 may not be right when that person reaches age 55. A life strategy fund at 60/40 might be needlessly aggressive for a 70 year old retiree. Would most people do ok with a 60/40 allocation for a life time -- probably.

For me I don't believe there is any substitute for periodically reviewing your health, expense needs, need to take risk/risk tolerance and portfolio size to determine what if any adjustments need to be made - especially approaching and/or in retirement.
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Toons
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Re: AA of 60/40 for your Lifetime?

Post by Toons »

In my observation 60/40 is a comfortable sweet spot for investing.Not too hot ,not too cold,,during bull or bear. :happy
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John3754
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Re: AA of 60/40 for your Lifetime?

Post by John3754 »

rkhusky wrote:The more stocks you have, the better you do, but you have a higher chance for poor results. Risk vs. Reward. It appears fairly monotonic but I haven't plotted it out. If so, no sweet spot.
There may not be a nominal "sweet spot" but that doesn't mean there isn't a risk adjusted "sweet spot".
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TVKNSC
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Re: AA of 60/40 for your Lifetime?

Post by TVKNSC »

Personally, the main reason I chose 80/20 is because I wanted to be a litte "risky" due to my semi-late start with investing. More than likely I would be in 60/40 range if I felt our net worth was where it should be at our ages. I read about max equity loss exposure and I am certainly not excited about potentially losing 35% or more of my portfolio, but I also realize a large part of investing is risk/reward.
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chaz
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Re: AA of 60/40 for your Lifetime?

Post by chaz »

Toons wrote:In my observation 60/40 is a comfortable sweet spot for investing.Not too hot ,not too cold,,during bull or bear. :happy
I agree. :beer
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midareff
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Re: AA of 60/40 for your Lifetime?

Post by midareff »

AA is a measure of risk. 80/20 is more risky than 60/40 and so forth. As you age your definition of risk changes. Young investor, ... the risk of not saving/having enough to retire. Older investor, .... the risk of having market upheaval that moves or removes the imminent prospect of retirement. Retired investor, ... the risk of running out of assets before running out of life.

Other risks that cloud memories..... the SP500 produced little for almost 12 years before the massive drop leading to the run up since the Feb 2009 bottom. What's your need to take risk? How does that reflect in your AA? Next is inflation (CPI-U) ... 9.1% total December 2007 to 2013, 6 years. December 1975 to 82, 55.29% .. 6 years. Risk comes in so many flavors besides no even knowing how long you will live (read: portfolio is to last).

If a 58% allocation to bonds represents a reasonable CPI-U liability match for the next 30 years at age 66 do you stay 60/40 or take the match? Everything takes course corrections so 60/40 for life.. who knows?
rjm_cali
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Re: AA of 60/40 for your Lifetime?

Post by rjm_cali »

I'm a beginner but it seems to me that keeping to a 60/40 which seems to provide most of the gains of any market period and ameliorates risk from volatility also reduces the risk of emotion bringing about bad decisions. Not so strong on stock that you might up your stock allocation in good times and sell it in bad.
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FelixTheCat
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Re: AA of 60/40 for your Lifetime?

Post by FelixTheCat »

It is all about how you sleep at night. If the stock market dropped 40% in the next month, how would you feel about your asset allocation?
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flyingaway
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Re: AA of 60/40 for your Lifetime?

Post by flyingaway »

asif408 wrote:I think a legitimate argument could be made. It seems to me that the more you can save the less need their is to have a high allocation to stocks. I kind of wonder about individuals who have six figure salaries, can save 20%+ of their earnings annually, and still have 90-100% of their investments in stocks. To me, the idea is to preserve capital, then make it grow. Seems to me they don't need to take the risk because they will have more than enough money in retirement. Personally, if I was one of these individuals I would have a 60/40 or even 50/50 portfolio.

Personally I am not a fan of extremes in investing (or most other areas of life for that matter). From the research I've seen, there isn't much additional expected return to having more than 80% in stocks and greater risk. For an all bond portfolio, there is little additional risk to adding 20% stocks to an all bond portfolio, and a higher expected return. I like Benjamin Graham's advice to keep 25-75% of your portfolio in bonds.

I am 34 and have a 70/30 portfolio but I would be comfortable with a 60/40 as well. I would be less comfortable with an 80/20 portfolio and very uncomfortable with a 90/10 or 100/0 portfolio.
I think for high earners, more stocks may be justified as additional new money can be used to do re-balance without using bond.
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Re: AA of 60/40 for your Lifetime?

Post by Sconie »

An article that may be of interest to you: "The 60/40 Solution"

http://web.archive.org/web/200612140619 ... in6040.pdf
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Re: AA of 60/40 for your Lifetime?

Post by Grt2bOutdoors »

flyingaway wrote:
asif408 wrote:I think a legitimate argument could be made. It seems to me that the more you can save the less need their is to have a high allocation to stocks. I kind of wonder about individuals who have six figure salaries, can save 20%+ of their earnings annually, and still have 90-100% of their investments in stocks. To me, the idea is to preserve capital, then make it grow. Seems to me they don't need to take the risk because they will have more than enough money in retirement. Personally, if I was one of these individuals I would have a 60/40 or even 50/50 portfolio.

Personally I am not a fan of extremes in investing (or most other areas of life for that matter). From the research I've seen, there isn't much additional expected return to having more than 80% in stocks and greater risk. For an all bond portfolio, there is little additional risk to adding 20% stocks to an all bond portfolio, and a higher expected return. I like Benjamin Graham's advice to keep 25-75% of your portfolio in bonds.

I am 34 and have a 70/30 portfolio but I would be comfortable with a 60/40 as well. I would be less comfortable with an 80/20 portfolio and very uncomfortable with a 90/10 or 100/0 portfolio.
I think for high earners, more stocks may be justified as additional new money can be used to do re-balance without using bond.
Not if you're unemployed, not if your clients dry up "overnight" because they experience such an economic hardship they cut "all the way back to the bone", not if you have no liquidity. As with anything in life, there are risks and then there are "risks", a bit of prudence is required to make it to the finish line.
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Re: AA of 60/40 for your Lifetime?

Post by chaz »

Sconie wrote:An article that may be of interest to you: "The 60/40 Solution"

http://web.archive.org/web/200612140619 ... in6040.pdf
A very good article. Thanks.
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feh
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Re: AA of 60/40 for your Lifetime?

Post by feh »

I was at 100% equities until retirement-7 years. I should have started becoming more conservative sooner, but I can't criticize 100% equities for somebody under 35 (assuming they don't panic sell).

Anyway, currently at 70/30 at T-2 years, working my way down to 60/40, and I anticipate staying there forever.
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hornet96
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Re: AA of 60/40 for your Lifetime?

Post by hornet96 »

Grt2bOutdoors wrote:
flyingaway wrote:
asif408 wrote:I think a legitimate argument could be made. It seems to me that the more you can save the less need their is to have a high allocation to stocks. I kind of wonder about individuals who have six figure salaries, can save 20%+ of their earnings annually, and still have 90-100% of their investments in stocks. To me, the idea is to preserve capital, then make it grow. Seems to me they don't need to take the risk because they will have more than enough money in retirement. Personally, if I was one of these individuals I would have a 60/40 or even 50/50 portfolio.

Personally I am not a fan of extremes in investing (or most other areas of life for that matter). From the research I've seen, there isn't much additional expected return to having more than 80% in stocks and greater risk. For an all bond portfolio, there is little additional risk to adding 20% stocks to an all bond portfolio, and a higher expected return. I like Benjamin Graham's advice to keep 25-75% of your portfolio in bonds.

I am 34 and have a 70/30 portfolio but I would be comfortable with a 60/40 as well. I would be less comfortable with an 80/20 portfolio and very uncomfortable with a 90/10 or 100/0 portfolio.
I think for high earners, more stocks may be justified as additional new money can be used to do re-balance without using bond.
Not if you're unemployed, not if your clients dry up "overnight" because they experience such an economic hardship they cut "all the way back to the bone", not if you have no liquidity. As with anything in life, there are risks and then there are "risks", a bit of prudence is required to make it to the finish line.
I think it depends more on whether your human capital (employment-based income) is more "bond-like" or "equity-like." If a person has a very high income that is reasonably expected to remain stable, one would consider their human capital to resemble a bond, and could (perhaps should?) allocate more of their financial capital towards equities. Of course, although this individual may have a higher ability to take financial capital risk, this individual would need to adjust their allocation to equities for their particular willingness to take risk.

In the scenario you paint above, it would seem like that kind of person's human capital is more equity-like (volatile); so yes, his financial capital should probably be allocated more towards bonds.

Of course, the problem with all of this is trying to come up with a reasonable valuation of one's human capital in order to assess his "true" asset allocation... but that's another topic I suppose.
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Re: AA of 60/40 for your Lifetime?

Post by Nerdicus »

I approximate the Rick Ferri 60/40 portfolio via my 401(k) (40% U.S. Stocks/20% Intl Stocks/40% Total Bond) and will keep this forever. I am however doing the Vanguard Target Retirement 2040 fund via an IRA that is 90/10 AA. I chose this cause in a year or two it will begin it's glide path to become more conservative over time and this will be the fund I'll drawn down first all the while I'll keep my 60/40 in the 401(k). Also, only 1/3 of the money I invest goes into the IRA while 2/3 is going into the 401(K)
Ki_poorrichard
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Re: AA of 60/40 for your Lifetime?

Post by Ki_poorrichard »

It depends on your risk tolerance for equities. More risk = higher return (allocate more to stocks), Less risk = less return (allocate more to bonds). You decide.
Last edited by Ki_poorrichard on Sun Aug 31, 2014 4:00 am, edited 1 time in total.
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stemikger
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Re: AA of 60/40 for your Lifetime?

Post by stemikger »

I like how you think. I often thought about doing this myself and who knows maybe I will. What could be sweeter than holding the Vanguard Balanced Index Fund for life and never looking back. Investing doesn't get easier than that and IMHO is the essence of what John Bogle teaches. Scott Burns makes a good case for the couch potato 50/50 portfolio and how it can be held for your entire lifetime.

You may find the article below interesting.

http://www.marketwatch.com/story/get-th ... 2014-06-06


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rkhusky
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Re: AA of 60/40 for your Lifetime?

Post by rkhusky »

John3754 wrote:
rkhusky wrote:The more stocks you have, the better you do, but you have a higher chance for poor results. Risk vs. Reward. It appears fairly monotonic but I haven't plotted it out. If so, no sweet spot.
There may not be a nominal "sweet spot" but that doesn't mean there isn't a risk adjusted "sweet spot".
If there is no sweet spot in risk and no sweet spot in return, then there is no sweet spot in risk-adjusted return.

However, there can be a subjective sweet spot where you feel comfortable with the risk and return of your portfolio. However, your degree of comfort may change after a big drop, where you lose a significant part of your money, or a big gain, when you are not reaping the rewards of your buddies or relatives.
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Re: AA of 60/40 for your Lifetime?

Post by pkcrafter »

Toons wrote:In my observation 60/40 is a comfortable sweet spot for investing.Not too hot ,not too cold,,during bull or bear. :happy
Yes, the Goldilocks Allocation. :happy


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Re: AA of 60/40 for your Lifetime?

Post by JLJL »

chaz wrote:
Sconie wrote:An article that may be of interest to you: "The 60/40 Solution"

http://web.archive.org/web/200612140619 ... in6040.pdf
A very good article. Thanks.

Agreed, thanks
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galeno
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Re: AA of 60/40 for your Lifetime?

Post by galeno »

For us 40-60% stocks is the sweet spot for a retirement portfolio.
KISS & STC.
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