60/40 Retirement Strategy

The traditional “60/40” retirement investment strategy involves allocating 60% of an investor’s portfolio into stocks and 40% into bonds. This strategy assumes that the prices of these basic investment components tend to move in opposite directions. For example, when bond prices fall, stock prices should rise to ensure stability in the investor’s overall portfolio. Recent studies, however, have proposed that it would be better to change to a pure equities investment strategy. Rather than allocating funds between stocks and bonds, these studies show that investors would reap greater returns by allocating retirement funds between domestic stocks and international stocks.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about research that shows the 60/40 retirement investment strategy is ineffective.

Below is a summary of the debate that ensued between the two professors.

Their Votes:





Their Reasons:

Byrnes: Investors would have to save nearly double the amount to reach the same retirement income yields using a traditional 60/40 investment strategy when compared to a pure equities-based investment strategy. These results alone should provide a significant motivation to ditch the 60/40 investment strategy. Sticking to a 60/40 strategy that involves stability in exchange for loss of the opportunity to reap higher returns doesn’t make sense when maximizing return on investment is our top priority.

Bloink: A 60/40 equity-to-bonds investment strategy is a tried-and-true method for diversifying a retirement investor's portfolio—and returns for 2024 show that the strategy is working. Yes, investors should be concerned with maximizing their returns in the equities market. That said, we all know how volatile the stock markets can be. Dumping 100% of a retirement investor’s funds into the equities market creates risks that most investors can’t tolerate.

_________________________________

Byrnes: Inflation and lower interest rates are both serious risks when it comes to this 60/40 allocation strategy. Inflation can erode the value of the fixed gains offered by bond investments. In low-interest rate environments, bonds don't always offer the yields that could offset stock market volatility in the first place. We’re entering a period where we’re going to see interest rates drop under the Trump administration. Retirement investors should be carefully evaluating that impact.

Bloink: When we're talking about a client's financial stability for the uncertain duration of their retirement, we have to be giving the bond allocations the value they deserve. This diversified strategy is essential to protecting the financial health of retirees once they're no longer in their working years. We’re talking about long-term investment strategies.

_________________________________

Byrnes: In the end, the 60/40 strategy fails to take the individual investor's situation and risk tolerance into account. It’s a cookie-cutter approach that should be changed to account for expected higher-than-average returns coming out of the equity markets under the Trump administration.

Bloink: Investors shouldn’t be making major changes to their investment strategies merely because we’re facing a change in presidential administrations. Historically, the best and worst trading days tend to be close together. Attempting to time the market by making major changes is rarely going to yield the returns that retirement investors are expecting. A balanced mix of investments is the best way to optimize the investor’s overall success.