Why Does The 60/40 Work So Well?
Why Does The 60/40 Work So Well?
Why is it that the 60/40 stock and bond AA seems to have stood the test of time? Of course I understand that it depends upon which funds you invest into and that the returns for a 60/40 are moderate to good. However, the 60/40 just seems to work. I've read many articles written by critics lambasting it, but to me this is just senseless noise. What are your opinions on the 60/40?
Re: Why Does The 60/40 Work So Well?
It fits my risk profile nicely!
I ignore the noise.
I ignore the noise.
Fools think their own way is right, but the wise listen to others.
Re: Why Does The 60/40 Work So Well?
I am 50/50. I am 64 years old, retired, and don't want the risk of a higher stock allocation.
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The most important thing you should know about me is that I am not an expert.
Re: Why Does The 60/40 Work So Well?
60/40 seems to be just right. When the stock market is rocking and rolling you are participating, when the stock market is in a downward spiral, you still have 40% of your portfolio in bonds that hopefully will act as a diversifier. I always loved Peter Bernstein's article the 60/40 solution. He really nails it on why it seems to be the ideal asset allocation for many investors.
John Bogle owns the Vanguard Balanced Index Fund in his own portfolio and has bought it for his Grandchildren over the years. Jack was recently asked when interviewed by Tom Gardner of the Motley Fool how many funds an index investor needs and without hesitation he said you can do it with one. His choice was the Vanguard Balanced Index Fund. If it's good enough for him, it's good enough for me. What could be easier and it comes with low cost. You own one fund (in a tax deferred account) and never having to worry about your portfolio. In Mr. Bogle's own words, "Investing doesn't get any better than that". The ultimate in simplicity.
I also agree many of those articles lambasting the 60/40 solution are akin to the buy and hold is dead articles. They are nothing but noise. The fundamentals of investing are timeless. I'm 50 years old and I'm currently heading to 70/30 AA. In 5 years I will probably be 65/35 and finally at 60 I will remain at 60/40 for quite a while.
Here is the link to Peter Bernstein's article entitled the 60/40 solution.
http://web.archive.org/web/200612140619 ... in6040.pdf
Here is a link to John Bogle being interviewed at The Motley Fool
https://www.youtube.com/watch?v=6Qg959oYCxU
John Bogle owns the Vanguard Balanced Index Fund in his own portfolio and has bought it for his Grandchildren over the years. Jack was recently asked when interviewed by Tom Gardner of the Motley Fool how many funds an index investor needs and without hesitation he said you can do it with one. His choice was the Vanguard Balanced Index Fund. If it's good enough for him, it's good enough for me. What could be easier and it comes with low cost. You own one fund (in a tax deferred account) and never having to worry about your portfolio. In Mr. Bogle's own words, "Investing doesn't get any better than that". The ultimate in simplicity.
I also agree many of those articles lambasting the 60/40 solution are akin to the buy and hold is dead articles. They are nothing but noise. The fundamentals of investing are timeless. I'm 50 years old and I'm currently heading to 70/30 AA. In 5 years I will probably be 65/35 and finally at 60 I will remain at 60/40 for quite a while.
Here is the link to Peter Bernstein's article entitled the 60/40 solution.
http://web.archive.org/web/200612140619 ... in6040.pdf
Here is a link to John Bogle being interviewed at The Motley Fool
https://www.youtube.com/watch?v=6Qg959oYCxU
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
Re: Why Does The 60/40 Work So Well?
I think there are some assumptions that may not be entirely accurate in the idea that a 60/40 allocation is some sweet spot that works better than others.
Perhaps most investors in the age range 50-70 would have been better off investing in LT Treasuries and no stocks.
Many people might sell at market bottoms at 60% equities.
Why not 80/20 with the 20 being LT treasuries if we truly believe the bond portion is to cushion equity downturns?
Why do we assume that we are immune from a Great Depression like event and that we will have the willingness, ability to stick with 60/40 when equities lose 80-90% of their value?
Do we assume that the recovery since March of 2009 was preordained? or were choices made that changed the outcome and will those decisions/choices always be made or maybe we will not have to make those choices in the future because everything is .......fixed?
Just because 60/40 works for some, doesn't mean it is the best for most.
Data on portfolio returns pretty much indicates 60/40 not the best but maybe there is some behavioral science proving it is best??????
My guess is that if 60/40 is good for you now, in 20 years it will not be.
Jim
Jim
Perhaps most investors in the age range 50-70 would have been better off investing in LT Treasuries and no stocks.
Many people might sell at market bottoms at 60% equities.
Why not 80/20 with the 20 being LT treasuries if we truly believe the bond portion is to cushion equity downturns?
Why do we assume that we are immune from a Great Depression like event and that we will have the willingness, ability to stick with 60/40 when equities lose 80-90% of their value?
Do we assume that the recovery since March of 2009 was preordained? or were choices made that changed the outcome and will those decisions/choices always be made or maybe we will not have to make those choices in the future because everything is .......fixed?
Just because 60/40 works for some, doesn't mean it is the best for most.
Data on portfolio returns pretty much indicates 60/40 not the best but maybe there is some behavioral science proving it is best??????
My guess is that if 60/40 is good for you now, in 20 years it will not be.
Jim
Jim
Re: Why Does The 60/40 Work So Well?
Warren Buffet is suggesting for his heirs if recollected correctly :-
10% short term bonds
90% US Stocks (S&P500)
uncertain about his rebalancing
We use Dynamic Asset Allocation at present, varying stock percentage dependent on valuations, with progressive part rebalancing each month/quarter. However when we hand the baton over to our heirs (who find money matters boring), we are thinking Warren B's allocation a bit fierce, and our thinking is moving towards setting up instructions/trusts with the portfolio set something like :-
25% TIPS type bonds
75% Stocks
EDIT : maybe rebalance every four years or never?
60/40 seems a little too low on stocks for the long term.
10% short term bonds
90% US Stocks (S&P500)
uncertain about his rebalancing
We use Dynamic Asset Allocation at present, varying stock percentage dependent on valuations, with progressive part rebalancing each month/quarter. However when we hand the baton over to our heirs (who find money matters boring), we are thinking Warren B's allocation a bit fierce, and our thinking is moving towards setting up instructions/trusts with the portfolio set something like :-
25% TIPS type bonds
75% Stocks
EDIT : maybe rebalance every four years or never?
60/40 seems a little too low on stocks for the long term.
Last edited by magneto on Tue Dec 30, 2014 6:11 am, edited 1 time in total.
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Re: Why Does The 60/40 Work So Well?
Isn't much of the success of 60/40 attributable to a 30+ year bull market in bonds? I would think over the next 30 years, having a 40% bond allocation, while providing portfolio stability during down times, will likely drag overall return much more than it has over the past 30 years.
Re: Why Does The 60/40 Work So Well?
You are right Eric. Warren Buffett agrees with you.Eric76 wrote:Isn't much of the success of 60/40 attributable to a 30+ year bull market in bonds? I would think over the next 30 years, having a 40% bond allocation, while providing portfolio stability during down times, will likely drag overall return much more than it has over the past 30 years.
https://www.youtube.com/watch?v=I1PWBsUZvUE
http://video.cnbc.com/gallery/?video=3000166399
At 50 I enjoyed some good returns on bonds and a flat decade in stocks. I actually talked to Vanguard and they still believe bonds should be included in your portfolio as a diversifier. Warren disagrees. Jack Bogle agrees that we should hold bonds, but adds a caveat we don't hear that often. You should include your social security as part of your fixed income. If this is the case, many of us should hold more stocks then we already do. For me the solution is to save more and instead of 60/40 go to 70/30.
However, I feel we are not facing reality if we think interest rates are not going to go up significantly in the near future. When is anyone's guess, but all the experts agree it will happen. However, does that mean taking on too much risk in the equity side or maybe by being heavy in bonds, we are taking just as much risk due to inflation? Who knows. I know I don't have a big enough portfolio to see it go down 50% but I also want my money to outlive me and go to my heirs.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
Re: Why Does The 60/40 Work So Well?
Hi Jim,jimkinny wrote:Why not 80/20 with the 20 being LT treasuries if we truly believe the bond portion is to cushion equity downturns?
Why do we assume that we are immune from a Great Depression like event and that we will have the willingness, ability to stick with 60/40 when equities lose 80-90% of their value?
Do we assume that the recovery since March of 2009 was preordained? or were choices made that changed the outcome and will those decisions/choices always be made or maybe we will not have to make those choices in the future because everything is .......fixed?
Jim
IMHO I think if we have another 2009 it will not matter what we are in. When I watch documentaries about what happened in 2009, many experts who were interviewed all say how close to the edge we really came and in a lot of ways it was still worse than the Great Depression. Warren Buffett called it an economic Pearl Harbor. I'm sure we will see fits and starts because you can't take all the boom and busts out of a capitalist society, but I truly think that was a once in a lifetime for this generation. Hopefully we don't see another one that bad in our lifetime because I fear if we do, all bets are off.
I like to watch videos of Warren Buffett where he says very confidently the best years are ahead for this country.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
Re: Why Does The 60/40 Work So Well?
If you're asking for quantitative analysis that proves it's optimum, I don't believe that exists, except as a very vague statistical measure. Run some numbers in firecalc, and you've probably got the state-of-the-art. It's a psychological feel-good number, not too hot, not too cold. Since people's outlook on life changes with personality, age and circumstances, people fine-tune the ratio.
Edit: Rebalancing is the same-- some people feel good rebalancing to the percent a few times per year. I basically never do, since I consider it unpredictable within 10-20%. What feels good?
Edit: Rebalancing is the same-- some people feel good rebalancing to the percent a few times per year. I basically never do, since I consider it unpredictable within 10-20%. What feels good?
Re: Why Does The 60/40 Work So Well?
60/40 is the AA used by pension plans. I think also I've read before 60/40 also roughly matches a target retirement prorated over a lifetime.
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Re: Why Does The 60/40 Work So Well?
If bond yields are 'too low' then expectations of stock returns are too high.stemikger wrote:You are right Eric. Warren Buffett agrees with you.Eric76 wrote:Isn't much of the success of 60/40 attributable to a 30+ year bull market in bonds? I would think over the next 30 years, having a 40% bond allocation, while providing portfolio stability during down times, will likely drag overall return much more than it has over the past 30 years.
https://www.youtube.com/watch?v=I1PWBsUZvUE
http://video.cnbc.com/gallery/?video=3000166399
At 50 I enjoyed some good returns on bonds and a flat decade in stocks. I actually talked to Vanguard and they still believe bonds should be included in your portfolio as a diversifier. Warren disagrees. Jack Bogle agrees that we should hold bonds, but adds a caveat we don't hear that often. You should include your social security as part of your fixed income. If this is the case, many of us should hold more stocks then we already do. For me the solution is to save more and instead of 60/40 go to 70/30.
However, I feel we are not facing reality if we think interest rates are not going to go up significantly in the near future. When is anyone's guess, but all the experts agree it will happen. However, does that mean taking on too much risk in the equity side or maybe by being heavy in bonds, we are taking just as much risk due to inflation? Who knows. I know I don't have a big enough portfolio to see it go down 50% but I also want my money to outlive me and go to my heirs.
Ie if we really are expecting bond yields to go back to 5%, that can't be good for stocks, either.
Conversely if bond yields are right, then stocks won't return 8-9% pa, we'll be lucky to get 6%.
Given that equities are hugely volatile, as we have seen, there is a considerable benefit in having a large weighting of bonds which one can rebalance into.
If there is a repeat of the 70s (high inflation and low stock returns) then it's going to be a lousy strategy-- either way. Adding 20% TIPS would help in that case.
60 40 is an admission that basically we don't know, we might have Japan style deflation and then we would be very glad of 40% bonds.
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Re: Why Does The 60/40 Work So Well?
I am more of a 40/60 man myself. The 40 is very broadly diversified and factor-tilted. The 60 is high-quality FI.
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Re: Why Does The 60/40 Work So Well?
Maybe I'm missing the point, but to me it seems like it's not the percentage that matters so much as the absolute value compared to your expenses.
When I retire, I plan to have 5x annual expenses in bonds and the rest in stocks. If you're more conservative, maybe 10-15x. Before retirement, I will continue to have significantly less than 5x in bonds.
When I retire, I plan to have 5x annual expenses in bonds and the rest in stocks. If you're more conservative, maybe 10-15x. Before retirement, I will continue to have significantly less than 5x in bonds.
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Re: Why Does The 60/40 Work So Well?
60/40 is good, but I've preferred to be more aggressive in the early accumulation phase, and more conservative later on.
I was 100% stocks until 40 years old. It suited me well at that phase. I would not have benefited much from a re-balancing premium since the assets were not large versus what I was increasingly adding each year.
In my mid-50s, I am now only 40% stocks. I have enough to last me the rest of my lifetime, even at a conservative, sub-4% SWR. So I really don't want to put my retirement at risk. At 40% equities, I still enjoy the boom times. However, I'm happy my portfolio will not decline more than 25% in deep recession.
I was 100% stocks until 40 years old. It suited me well at that phase. I would not have benefited much from a re-balancing premium since the assets were not large versus what I was increasingly adding each year.
In my mid-50s, I am now only 40% stocks. I have enough to last me the rest of my lifetime, even at a conservative, sub-4% SWR. So I really don't want to put my retirement at risk. At 40% equities, I still enjoy the boom times. However, I'm happy my portfolio will not decline more than 25% in deep recession.
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Re: Why Does The 60/40 Work So Well?
Unlikely, because I am pretty sure the historical origins of this allocation go back to Markowitz's work on modern portfolio theory in the early 1950s. Pensions funds which had traditionally used bonds and an obligation-matching strategy were adopting stocks, and I believe the whole motivation was to determine the best asset allocation for pension funds... and I think 60/40 was that optimum, even in the early 1950s.Eric76 wrote:Isn't much of the success of 60/40 attributable to a 30+ year bull market in bonds?....
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Re: Why Does The 60/40 Work So Well?
I don't know if they backtested it and found it optimum? Also real returns-- US bonds got hammered in the period just after WW2 (Fed kept interest rates down, suppressed inflation from the war period briefly soared).nisiprius wrote:Unlikely, because I am pretty sure the historical origins of this allocation go back to Markowitz's work on modern portfolio theory in the early 1950s. Pensions funds which had traditionally used bonds and an obligation-matching strategy were adopting stocks, and I believe the whole motivation was to determine the best asset allocation for pension funds... and I think 60/40 was that optimum, even in the early 1950s.Eric76 wrote:Isn't much of the success of 60/40 attributable to a 30+ year bull market in bonds?....
It may have been one of those 'it feels right' that later gets enshrined as science.
But, empirically, it has worked for a long time. And on *some* but not all of the scary periods of the past 70-80 years of investing, it worked well/ backtested to work well.
Let's face it, if we are in Japan you wanted 100% long US Treasuries. Anybody fancy that gamble?
Answer: no.
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Re: Why Does The 60/40 Work So Well?
I take the simple-minded view that if bond interest rates go up, then the bonds I have (individually and in bond funds) will mature and be replaced by bonds with higher interest rates and I will be earning more from my bonds than I do now.stemikger wrote:...However, I feel we are not facing reality if we think interest rates are not going to go up significantly in the near future. When is anyone's guess, but all the experts agree it will happen. However, does that mean taking on too much risk in the equity side or maybe by being heavy in bonds, we are taking just as much risk due to inflation? Who knows. I know I don't have a big enough portfolio to see it go down 50% but I also want my money to outlive me and go to my heirs.
Higher interest rates are good for bond owners.
This is so blindingly obvious I don't understand how people can miss it. Concerns about interest rate risk are concerns about short-term fluctuations in bond prices. What matters to me is long-term trends in bond total return.
I think three factors are in play in this widespread misunderstanding of what's good and bad for people investing in bonds for the long term.
The first is that Wall Street is focussed primarily on short-term speculation, simple as that.
The second is that if you are a novice speculator in bonds, the idea that bond market prices move the opposite direction of interest rates is both important and counterintuitive, so everybody who writes anything about bonds for novices always mentions it.
The third is the word "bond" can mean any fixed-interest investment, but the commonest use of it is in the context of Treasuries, in which anything with a term of 10 years or shorter is a "note" and "bond" means long-term bond. Therefore, ordinary folks in core bond funds are investing in intermediate-term bonds, but are constantly reading news and analysis that applies to "bonds" meaning long-term Treasuries.
Last edited by nisiprius on Tue Dec 30, 2014 9:42 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Why Does The 60/40 Work So Well?
Thanks Nisiprius. I appreciate you helping me out on this. I definitely have a strong learning curve to overcome when it comes to bonds.nisiprius wrote:I take the simple-minded view that if bond interest rates go up, then the bonds I have (individually and in bond funds) will mature and be replaced by bonds with higher interest rates and I will be earning more from my bonds than I do now.stemikger wrote:...However, I feel we are not facing reality if we think interest rates are not going to go up significantly in the near future. When is anyone's guess, but all the experts agree it will happen. However, does that mean taking on too much risk in the equity side or maybe by being heavy in bonds, we are taking just as much risk due to inflation? Who knows. I know I don't have a big enough portfolio to see it go down 50% but I also want my money to outlive me and go to my heirs.
Higher interest rates are good for bond owners.
This is so blindingly obvious I don't understand how people can miss it. Concerns about interest rate risk are short-term fluctuations in bond prices. What matters to me is long-term trends in bond total return.
I think three factors are in play in this widespread misunderstanding of what's good and bad for people investing in bonds for the long term.
The first is that Wall Street is focussed primarily on short-term speculation, simple as that.
The second is that if you are a novice speculator in bonds, the idea that bond market prices move the opposite direction of interest rates is both important and counterintuitive, so everybody who writes anything about bonds for novices always mentions it.
The third is the word "bond" can mean any fixed-interest investment, but the commonest use of it is in the context of Treasuries, in which anything with a term of 10 years or shorter is a "note" and "bond" means long-term bond. Therefore, ordinary folks in core bond funds are investing in intermediate-term bonds, but are constantly reading news and analysis that applies to "bonds" meaning long-term Treasuries.
Steve G.
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Re: Why Does The 60/40 Work So Well?
I dunno. I'd love to see a good "history of investment advice." You're right, though, 60/40 antedates Markowitz.Valuethinker wrote:...I don't know if they backtested it and found it optimum?...it may have been one of those 'it feels right' that later gets enshrined as science.... But, empirically, it has worked for a long time.nisiprius wrote:Unlikely, because I am pretty sure the historical origins of this allocation go back to Markowitz's work on modern portfolio theory in the early 1950s. Pensions funds which had traditionally used bonds and an obligation-matching strategy were adopting stocks, and I believe the whole motivation was to determine the best asset allocation for pension funds... and I think 60/40 was that optimum, even in the early 1950s.Eric76 wrote:Isn't much of the success of 60/40 attributable to a 30+ year bull market in bonds?....
Wellington began in 1929 as a balanced fund. John C. Bogle wrote that "Wellington Fund has followed the same balanced approach to investing ever since it began operations in mid-1929". He actually has a chart showing stock allocation:
Benjamin Graham's recommendation was "We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds." That was in The Intelligent Investor and someone should see if it was actually in the 1949 edition.
I think the reason why it "works so well" is this. Unlike most of the debatable minutia of different categories of stocks, stocks and bonds really are fundamentally different. However intuitive or quantitative investors are and how efficient or inefficient the market is, I suspect that investors are smart enough to demand roughly comparable risk-adjusted return in stocks and bonds. Therefore it is unlikely that either stocks or bonds is the master asset class, the One Ring to Rule Them All.
Meanwhile, because of their fundamentally different nature, stocks and bonds actually do have honest to gosh low correlation that is persistent--low enough to provide a robust improvement in risk-adjusted return for a mix, compared to either pure stocks or pure bonds.
In short, it really seems unlikely that 100% stocks could be intrinsically superior in risk-adjusted return to 100% bonds, or vice versa. And it really seems likely that a mix of the two--somewhere in Graham's range of 25/75 to 75/25--is intrinsically superior in risk-adjusted return to 100% of either.
I would not believe anyone who claimed to be able to prove that 60/40 is really better than 50/50, though.
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Re: Why Does The 60/40 Work So Well?
We love the 60/40 allocation. It seems like heaven. We've been there for 9 years now. For the previous 22 years we used an 80/20 allocation.
If the intermediate term TBM index (BND, AGG, or SCHZ) ever gets really cheap I can see us at 40/60.
If the intermediate term TBM index (BND, AGG, or SCHZ) ever gets really cheap I can see us at 40/60.
KISS & STC.
Re: Why Does The 60/40 Work So Well?
So if one were to do a 60/40, then what would be the best funds to use and % allocated to each funds? I am referring to something more than just a simple three-fund portfolio.
Re: Why Does The 60/40 Work So Well?
Why do you want to complicate things? The three fund portfolio has a great track record. If you are looking to slice and dice, you may want to read the Little Book of Common Sense Investing by John Bogle. He is not against it, but don't push too far because you may fall short of the market returns. Jack Bogle has often said if you want the ultimate in simplicity just choose one fund which is the Vanguard Balanced Index Fund. Good Luck.Humdrum wrote:So if one were to do a 60/40, then what would be the best funds to use and % allocated to each funds? I am referring to something more than just a simple three-fund portfolio.
Last edited by stemikger on Wed Dec 31, 2014 4:57 am, edited 1 time in total.
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Re: Why Does The 60/40 Work So Well?
I use the Vanguard LifeStrategy Moderate Growth Fund for my 60/40: https://personal.vanguard.com/us/funds/ ... IntExt=INTHumdrum wrote:So if one were to do a 60/40, then what would be the best funds to use and % allocated to each funds? I am referring to something more than just a simple three-fund portfolio.
Here is another way to do 60/40: http://www.coffeehouseinvestor.com/coff ... ortfolios/
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Re: Why Does The 60/40 Work So Well?
The infamous 60/40 3-fund Boglehead port is too complicated for us.
The older we get the more we appreciate simplicity and OUR preference for all world equity diversification combined with the cheapest USD denominated TBM ETF available to us.
So we pay a bit more and use a 2-fund port.
The older we get the more we appreciate simplicity and OUR preference for all world equity diversification combined with the cheapest USD denominated TBM ETF available to us.
So we pay a bit more and use a 2-fund port.
Humdrum wrote:So if one were to do a 60/40, then what would be the best funds to use and % allocated to each funds? I am referring to something more than just a simple three-fund portfolio.
KISS & STC.
Re: Why Does The 60/40 Work So Well?
I'm not there yet, but plan to be using the 60/40 model in another 10-15 years. Currently using the 70/30 one.
Re: Why Does The 60/40 Work So Well?
With retirement looming in a few months, I am more comfortable with a 40/60 allocations. With SS but no pension, I feel it is more prudent to be a bit cautious. I am not sure that 40/60 is all that much safer than 60/40 but living in the comfort of Wellesley I sleep well.
Re: Why Does The 60/40 Work So Well?
Well, shipmate Synergy, for simplicity, in my unqualified opinion, Wellesley (VWINX/VWIAX) at 35-40% equity, Target Retirement Income (VTINX) at 30% equity, or the LifeStrategy Income (VASIX) at 20% equity are good candidates for a SWAN or sleep well at night portfolio.synergy wrote:With retirement looming in a few months, I am more comfortable with a 40/60 allocations. With SS but no pension, I feel it is more prudent to be a bit cautious. I am not sure that 40/60 is all that much safer than 60/40 but living in the comfort of Wellesley I sleep well.
~ Member of the Active Retired Force since 2014 ~
Re: Why Does The 60/40 Work So Well?
Shipmate TC, this is a good allocation, maintain course and speed, steady as she goes.tc101 wrote:I am 50/50. I am 64 years old, retired, and don't want the risk of a higher stock allocation.
~ Member of the Active Retired Force since 2014 ~
Re: Why Does The 60/40 Work So Well?
I don't ever see our port leaving the range of 40-60% all world equities. You like a slower smoother ride so you hold 40%.
We don't mind a slightly faster bumpier ride because we'd rather LEAN towards cheaper equities vs more expensive bonds. When bonds are cheaper than stocks we'll join you at 40/60.
IMHO, VWINX is the BEST MF choice a retired USA person can make. VWELX is #2. Since 2006 both VWINX and VWELX beat our port by a CAGR of 0.5% and 1.0% respectively.
You chose VERY well,
We don't mind a slightly faster bumpier ride because we'd rather LEAN towards cheaper equities vs more expensive bonds. When bonds are cheaper than stocks we'll join you at 40/60.
IMHO, VWINX is the BEST MF choice a retired USA person can make. VWELX is #2. Since 2006 both VWINX and VWELX beat our port by a CAGR of 0.5% and 1.0% respectively.
You chose VERY well,
synergy wrote:With retirement looming in a few months, I am more comfortable with a 40/60 allocations. With SS but no pension, I feel it is more prudent to be a bit cautious. I am not sure that 40/60 is all that much safer than 60/40 but living in the comfort of Wellesley I sleep well.
KISS & STC.
Re: Why Does The 60/40 Work So Well?
60/40 seemed right during the accumulation phase (I doubt I ever hit the high 50's) and 40/60 seems right in the retirement phase. During the last few decades equities have done their thing and bonds were on a 30 year run.
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Re: Why Does The 60/40 Work So Well?
To help define the question, I'll assume that you mean a fixed AA of 60% equities; 40% bonds in low cost index funds,
and you assume that this stays the same over one's entire investing life.
I don't think that 60/40 is materially better than 50/50 or 70/30, what is most important is staying the
course with any of these strategies.
The other part of this is that using a fixed AA means that the AA must work decently for both the 20 year old and the 80 year old.
The AA is not as important when starting out, since the majority of portfolio growth is due to contributions.
The AA is very important late in the accumulation phase and into retirement, when most or all portfolio growth is determined by returns.
So if you want a fixed AA, rather than something that increase the bond allocation as you age, and the portfolio grows,
then 60/40 is a good compromise, and is something that most people can stay the course with.
and you assume that this stays the same over one's entire investing life.
I don't think that 60/40 is materially better than 50/50 or 70/30, what is most important is staying the
course with any of these strategies.
The other part of this is that using a fixed AA means that the AA must work decently for both the 20 year old and the 80 year old.
The AA is not as important when starting out, since the majority of portfolio growth is due to contributions.
The AA is very important late in the accumulation phase and into retirement, when most or all portfolio growth is determined by returns.
So if you want a fixed AA, rather than something that increase the bond allocation as you age, and the portfolio grows,
then 60/40 is a good compromise, and is something that most people can stay the course with.
Last edited by MathWizard on Wed Dec 31, 2014 1:59 pm, edited 1 time in total.
Re: Why Does The 60/40 Work So Well?
Buffett suggests 90/10, others suggest 30/70. 50/50 of both = 60/40Humdrum wrote: ↑Mon Dec 29, 2014 11:30 pm Why is it that the 60/40 stock and bond AA seems to have stood the test of time? Of course I understand that it depends upon which funds you invest into and that the returns for a 60/40 are moderate to good. However, the 60/40 just seems to work. I've read many articles written by critics lambasting it, but to me this is just senseless noise. What are your opinions on the 60/40?
At different times one will carry the other.
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Re: Why Does The 60/40 Work So Well?
I was 50/50 but due to what I get from SS and a pension I felt I could take on more risk so went to 65/25.
My take on your situation is, stay where you are unless and until you see a reason to change. This would be a matter of risk analysis (how much you are comfortable with) and the return you need/want your portfolio to produce.
Last edited by bertilak on Tue Jul 26, 2022 9:21 am, edited 1 time in total.
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Re: Why Does The 60/40 Work So Well?
I'm sure the posters from 7 years ago appreciate your feedback.
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Re: Why Does The 60/40 Work So Well?
Perhaps the OP will get back to us, tell us what he did and what was the outcome!burritoLover wrote: ↑Tue Jul 26, 2022 9:19 am I'm sure the posters from 7 years ago appreciate your feedback.
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Re: Why Does The 60/40 Work So Well?
I guess the outcome would be - not working so well this year.bertilak wrote: ↑Tue Jul 26, 2022 9:23 amPerhaps the OP will get back to us, tell us what he did and what was the outcome!burritoLover wrote: ↑Tue Jul 26, 2022 9:19 am I'm sure the posters from 7 years ago appreciate your feedback.
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Re: Why Does The 60/40 Work So Well?
Describing a portfolio as 60/40 is woefully inadequate in that do you hold short term bonds, long term? Maybe your entire stock allocation is emerging markets.
There can be extreme 60/40 portfolios.
There can be extreme 60/40 portfolios.
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Re: Why Does The 60/40 Work So Well?
Actually, if OP has been invested over the last seven years (60/40, 70/30, etc.), things may be working out just fine.burritoLover wrote: ↑Tue Jul 26, 2022 11:54 amI guess the outcome would be - not working so well this year.bertilak wrote: ↑Tue Jul 26, 2022 9:23 amPerhaps the OP will get back to us, tell us what he did and what was the outcome!burritoLover wrote: ↑Tue Jul 26, 2022 9:19 am I'm sure the posters from 7 years ago appreciate your feedback.
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Re: Why Does The 60/40 Work So Well?
Some investors don't take a long view of their portfolio - they just want to know why their portfolio is down YTD even if it was gangbusters for the prior 7 years. Stock/bond correlations are up notably this year so it isn't reacting the same as the last 20 years.KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 12:15 pmActually, if OP has been invested over the last seven years (60/40, 70/30, etc.), things may be working out just fine.burritoLover wrote: ↑Tue Jul 26, 2022 11:54 amI guess the outcome would be - not working so well this year.bertilak wrote: ↑Tue Jul 26, 2022 9:23 amPerhaps the OP will get back to us, tell us what he did and what was the outcome!burritoLover wrote: ↑Tue Jul 26, 2022 9:19 am I'm sure the posters from 7 years ago appreciate your feedback.
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Re: Why Does The 60/40 Work So Well?
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Last edited by KneeReplacementTutor on Tue Jul 26, 2022 1:35 pm, edited 2 times in total.
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Re: Why Does The 60/40 Work So Well?
We may never know. The OP is "humdrum" and when I click on his id I get "The requested user does not exist."KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 12:15 pmActually, if OP has been invested over the last seven years (60/40, 70/30, etc.), things may be working out just fine.burritoLover wrote: ↑Tue Jul 26, 2022 11:54 amI guess the outcome would be - not working so well this year.bertilak wrote: ↑Tue Jul 26, 2022 9:23 amPerhaps the OP will get back to us, tell us what he did and what was the outcome!burritoLover wrote: ↑Tue Jul 26, 2022 9:19 am I'm sure the posters from 7 years ago appreciate your feedback.
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Re: Why Does The 60/40 Work So Well?
This is pretty natural though. Anchoring (to portfolio peak say) and loss aversion are common human impulses. Learning to ignore such things takes some time for many folks.burritoLover wrote: ↑Tue Jul 26, 2022 12:31 pmSome investors don't take a long view of their portfolio - they just want to know why their portfolio is down YTD even if it was gangbusters for the prior 7 years. Stock/bond correlations are up notably this year so it isn't reacting the same as the last 20 years.KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 12:15 pmActually, if OP has been invested over the last seven years (60/40, 70/30, etc.), things may be working out just fine.burritoLover wrote: ↑Tue Jul 26, 2022 11:54 amI guess the outcome would be - not working so well this year.bertilak wrote: ↑Tue Jul 26, 2022 9:23 amPerhaps the OP will get back to us, tell us what he did and what was the outcome!burritoLover wrote: ↑Tue Jul 26, 2022 9:19 am I'm sure the posters from 7 years ago appreciate your feedback.
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Re: Why Does The 60/40 Work So Well?
Disappointing. I always enjoy getting OP’s follow up when a thread gets revived years later. Sounds like that’s not likely to happen here.bertilak wrote: ↑Tue Jul 26, 2022 1:04 pmWe may never know. The OP is "humdrum" and when I click on his id I get "The requested user does not exist."KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 12:15 pmActually, if OP has been invested over the last seven years (60/40, 70/30, etc.), things may be working out just fine.burritoLover wrote: ↑Tue Jul 26, 2022 11:54 amI guess the outcome would be - not working so well this year.bertilak wrote: ↑Tue Jul 26, 2022 9:23 amPerhaps the OP will get back to us, tell us what he did and what was the outcome!burritoLover wrote: ↑Tue Jul 26, 2022 9:19 am I'm sure the posters from 7 years ago appreciate your feedback.
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Re: Why Does The 60/40 Work So Well?
Some investors may in fact look at this year and ask themselves why their returns are down YTD. Hopefully they don't have to look far.burritoLover wrote: ↑Tue Jul 26, 2022 12:31 pmSome investors don't take a long view of their portfolio - they just want to know why their portfolio is down YTD even if it was gangbusters for the prior 7 years. Stock/bond correlations are up notably this year so it isn't reacting the same as the last 20 years.KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 12:15 pmActually, if OP has been invested over the last seven years (60/40, 70/30, etc.), things may be working out just fine.burritoLover wrote: ↑Tue Jul 26, 2022 11:54 amI guess the outcome would be - not working so well this year.bertilak wrote: ↑Tue Jul 26, 2022 9:23 amPerhaps the OP will get back to us, tell us what he did and what was the outcome!burritoLover wrote: ↑Tue Jul 26, 2022 9:19 am I'm sure the posters from 7 years ago appreciate your feedback.
To your point though, with stock/bond correlations notably up this year would the 60/40 portfolio be working significantly less well than 50/50, 70/30, etc.?
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Re: Why Does The 60/40 Work So Well?
Yes than 0/100 (cash).KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 1:36 pmSome investors may in fact look at this year and ask themselves why their returns are down YTD. Hopefully they don't have to look far.burritoLover wrote: ↑Tue Jul 26, 2022 12:31 pmSome investors don't take a long view of their portfolio - they just want to know why their portfolio is down YTD even if it was gangbusters for the prior 7 years. Stock/bond correlations are up notably this year so it isn't reacting the same as the last 20 years.KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 12:15 pmActually, if OP has been invested over the last seven years (60/40, 70/30, etc.), things may be working out just fine.burritoLover wrote: ↑Tue Jul 26, 2022 11:54 amI guess the outcome would be - not working so well this year.
To your point though, with stock/bond correlations notably up this year would the 60/40 portfolio be working significantly less well than 50/50, 70/30, etc.?
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Re: Why Does The 60/40 Work So Well?
It's very possible that a 60/40 may do a good job at minimizing one's maximum regret over the long-term, as discussed here.
However, such a portfolio has had very high start date sensitivity relative to many other portfolios, as discussed here.
More importantly, your goals, investing worldview, risk tolerance, beliefs, etc. should all impact your choice of portfolio. As such, a given portfolio 'working so well' is highly dependent on the investor in question. A 60/40 is probably great for many, and it's probably very bad for many others.
However, such a portfolio has had very high start date sensitivity relative to many other portfolios, as discussed here.
More importantly, your goals, investing worldview, risk tolerance, beliefs, etc. should all impact your choice of portfolio. As such, a given portfolio 'working so well' is highly dependent on the investor in question. A 60/40 is probably great for many, and it's probably very bad for many others.
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Re: Why Does The 60/40 Work So Well?
lol burritoLover. Is that what OP should have been considering seven years ago (instead of 60/40) or is that what they should have switched to when they looked into their crystal ball and saw this downturn coming before it happened?burritoLover wrote: ↑Tue Jul 26, 2022 3:48 pmYes than 0/100 (cash).KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 1:36 pmSome investors may in fact look at this year and ask themselves why their returns are down YTD. Hopefully they don't have to look far.burritoLover wrote: ↑Tue Jul 26, 2022 12:31 pmSome investors don't take a long view of their portfolio - they just want to know why their portfolio is down YTD even if it was gangbusters for the prior 7 years. Stock/bond correlations are up notably this year so it isn't reacting the same as the last 20 years.KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 12:15 pmActually, if OP has been invested over the last seven years (60/40, 70/30, etc.), things may be working out just fine.burritoLover wrote: ↑Tue Jul 26, 2022 11:54 am
I guess the outcome would be - not working so well this year.
To your point though, with stock/bond correlations notably up this year would the 60/40 portfolio be working significantly less well than 50/50, 70/30, etc.?
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Re: Why Does The 60/40 Work So Well?
Well, you asked what was doing better YTD. I don’t think the short-term has any relevance in portfolio construction. The context of this discussion is unrealistic expectations of 60/40 cultivated during the long bond bull market.KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 3:58 pmlol burritoLover. Is that what OP should have been considering seven years ago (instead of 60/40) or is that what they should have switched to when they looked into their crystal ball and saw this downturn coming before it happened?burritoLover wrote: ↑Tue Jul 26, 2022 3:48 pmYes than 0/100 (cash).KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 1:36 pmSome investors may in fact look at this year and ask themselves why their returns are down YTD. Hopefully they don't have to look far.burritoLover wrote: ↑Tue Jul 26, 2022 12:31 pmSome investors don't take a long view of their portfolio - they just want to know why their portfolio is down YTD even if it was gangbusters for the prior 7 years. Stock/bond correlations are up notably this year so it isn't reacting the same as the last 20 years.KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 12:15 pm
Actually, if OP has been invested over the last seven years (60/40, 70/30, etc.), things may be working out just fine.
To your point though, with stock/bond correlations notably up this year would the 60/40 portfolio be working significantly less well than 50/50, 70/30, etc.?
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Re: Why Does The 60/40 Work So Well?
Have a good rest of the day burritoLover.burritoLover wrote: ↑Tue Jul 26, 2022 4:08 pmWell, you asked what was doing better YTD. I don’t think the short-term has any relevance in portfolio construction. The context of this discussion is unrealistic expectations of 60/40 cultivated during the long bond bull market.KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 3:58 pmlol burritoLover. Is that what OP should have been considering seven years ago (instead of 60/40) or is that what they should have switched to when they looked into their crystal ball and saw this downturn coming before it happened?burritoLover wrote: ↑Tue Jul 26, 2022 3:48 pmYes than 0/100 (cash).KneeReplacementTutor wrote: ↑Tue Jul 26, 2022 1:36 pmSome investors may in fact look at this year and ask themselves why their returns are down YTD. Hopefully they don't have to look far.burritoLover wrote: ↑Tue Jul 26, 2022 12:31 pm
Some investors don't take a long view of their portfolio - they just want to know why their portfolio is down YTD even if it was gangbusters for the prior 7 years. Stock/bond correlations are up notably this year so it isn't reacting the same as the last 20 years.
To your point though, with stock/bond correlations notably up this year would the 60/40 portfolio be working significantly less well than 50/50, 70/30, etc.?