Allocation for Old Farts

Bank of America has declared the classic 60/40 (stock/bond) asset allocation model dead. What does that mean for old farts like me? Let’s take a look at asset allocation ideas for those nearing retirement age…

There once was a time when a 60/40 mix of stock to bonds was the classic “retirement” portfolio. A conservative mix of stocks for the good years, bonds for the downturns, and an easy “set it and forget it” approach to investing. Many retirees couple the 60/40 portfolio with the 4% rule that states that if you withdraw 4% of your invested money each year to live on, your money will not run out for at least 30 years.

Constructing the 60/40

It’s very easy to construct the 60/40 Portfolio with only 3 funds: 30% a Total Stock Market Index Fund (like VTSAX or SWTSX), 30% a Total International Stock Index Fund (like VTIAX or SWISX), and 40% a Total Bond Market Fund (like VBTLX or SWAGX). Rebalance once a year and you’re set…

Is the 60/40 Dead?

Now, however, it seems times have seemingly changed – at least in Bank of America’s eyes. Stocks and bonds are too closely correlated (meaning they are moving in unison instead historically opposite directions). Yields on bonds are too low (meaning they generate no income and are priced too high as a result). And many “experts” now say the 4% rule is too generous and should be renamed the 3% rule instead (meaning you’ll need to save more money for retirement or dramatically lower your expectations). Now what?

With stock evaluations and record highs, bond prices at record highs, and debt levels at record highs, where does this leave us? It’s safe to say that looking forward, expected returns for the next 10 years are far lower than the returns we’ve seen from the previous 10 years. Plan on that for sure.

If we can’t depend on the classic 60/40, is there another “classic” portfolio that may fit the bill?

The “All Weather Portfolio”

Ray Dalio’s “All Weather Portfolio” is designed to be agnostic to the market. According to Dalio, growth and inflation should be your only concerns in the market. They are either up or down, though in various combinations. Growth is up; inflation is down. Growth is down, inflation is up, etc. His portfolio is designed to make money in all market conditions. The allocation of both inflationary & deflationary investments aim to lower volatility while attempting to enhance returns over the long-term. It’s heavy on the fixed income side (bonds) with interest rate risk. It attempts to offset that risk with exposure to inflationary assets in the gold & commodities realm, along with equities (obviously). This portfolio will probably never set the world on fire with its returns, but it will most likely never crash and burn either. Such as its aim.

Stocks: 30% Domestic Total Stock Market (VTI)

Bonds: 40% Long Term (BLV) + 15% Intermediate-Term (BIV)

Real Assets: 7.5% Commodities (GSG or DBC) + 7.5% Gold (GLD)

It’s simple, easy to manage, easy to re-balance, and diverse enough to capture the corners of the market where the 60/40 may not reach. It’s one option, and it’s a good option. If you know Ray Dalio, his research his impeccable. That research is the reason his results are untouchable.

Is There a Winner?

Honestly, I have no idea. For me these are 2 balanced, conservative and “market neutral” starting points for asset allocation. Personally I still have a much more broadly diversified mix by way of Robo funds, bond funds, individual stocks, real estate, and speculative investments. My mix is approximately 80/20 and I’m comfortable enough with that for now.

Time in the Market

If you are younger, you need to be swinging for the fences. You should 100% equities or close to it. You have time to weather the dips along the way, and even exploit them to your advantage.

If you are nearing retirement, you’re most likely wanting to smooth out the ride and insulate yourself from wild market swings. At the same time you need to make sure your money continues to grow at a rate where it will outlive you and provide for a retirement you can enjoy. Ideally that growth in your portfolio will outpace inflation by the rate at which you are withdrawing.

What I Think

I don’t think the 60/40 is dead. I do think the “All Weather Portfolio” is a viable option. I do think we’re in a paradigm shift in the market, owing to the Fed’s involvement and their efforts to keep interest rates artificially low to fuel borrowing and spending. Combine this with the fact the Fed is actively trading in the market and ask yourself “why is that?”. I don’t think we bring this thing in for a smooth landing, but I don’t know when that landing will happen.

Get debt free, stay debt free, live modestly and below your means, keep an eye on your allocations, adjust your expectations, and keep an eye on the news but don’t let panic and fear drive your decision making process. This goes for all ages. As we look at asset allocation ideas for those nearing retirement age, however, old farts like me still have a fighting chance.

Just stay off of my lawn!

The mutual funds & ETFs that are linked above are ideas only, and not meant to be recommendations or offers to invest. Always do your own due diligence and seek the guidance of a reputable, fee-based investment professional where you feel it may be prudent. Act natural.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: