The Problem With the 60/40 Portfolio

For decades, financial advisors have leaned on the “sixty-forty” portfolio as the gold standard on how someone should invest. Put sixty percent in stocks for growth, forty percent in bonds for stability, and rebalance back to that ratio whenever it drifts. It became the default recommendation for so long that plenty of people never questioned where the numbers actually came from and whether it makes sense for them.

If you ask most people why their portfolio is split close to that ratio, the answer usually comes from one of two places. Either they picked up a version of the old formula that’s been passed around for generations: subtract your age from one hundred, and whatever’s left is the percentage that belongs in stocks, with the rest sitting in bonds. A fifty-five-year-old who follows that formula lands at forty-five percent in stocks. A seventy-year-old person lands at thirty percent in stocks. The formula moves in one direction only: toward a more conservative position vis a vis stocks every year regardless of what’s going on in that person’s life. Or their advisor simply used the same mix for every client who walks through the door, regardless of what that particular client needed.

The real question allocation is supposed to answer has less to do with the investor’s age and more to do with their timing and temperament. Timing is straightforward enough. When will this money actually be needed, and what happens to the plan if the market drops hard right before that moment arrives? Money that won’t be touched for a decade can absorb a few rough years and recover long before it’s needed. Money that is needed in a year’s time does not have that same luxury.

A seventy-year-old with a pension covering every expense and no plans to touch the portfolio for fifteen years makes the point clearly. That person is in a completely different position than a seventy-year-old who draws income from that same account every month. Yet, using the old “one hundred minus your age” rule would produce the same portfolio for each of them. Two clients, one seventy and one sixty, with identical portfolios can have the same correct allocation, or a seventy-year-old and a thirty-five-year-old saving for a house in two years can need something closer to the opposite of what their ages would suggest. Age tells you almost nothing on its own; timing is what actually matters.

Temperament is the harder one because no single formula measures it and no projection accounts for it. Someone can run every projection and conclude correctly that an aggressive portfolio gives them the best odds of a larger account value down the road. That conclusion means very little if the same person cannot sit through a bad year without liquidating their portfolio out of fear the markets won’t recover because “this time is different.” The same thing happens in reverse during a strong run in the market, when a string of good years convinces a person they have a much bigger appetite for risk than they actually do, right up until the next downturn proves otherwise. Even careful, disciplined people are not robots, and an allocation that looks perfect on paper but leads one person to sell at the bottom out of fear or overinvest in risky stocks due to overconfidence means the allocation was not correct from the start.

Figuring out where someone actually falls on that spectrum, as opposed to where they’d like to believe they fall, takes more than a questionnaire. It takes an experienced advisor who has watched enough clients live through both a downturn and a rally to recognize the difference between genuine risk tolerance and a temporary mood.

Now picture two retirees, both sixty-eight and both with the same size portfolio and the same timeline for spending it. One of them watched her account drop by a third in a past downturn and didn’t sleep for a month, calling her advisor twice a week asking whether she should get out. The other lived through the same downturn and barely checked his statement, reasoning that he wasn’t spending the money for another decade anyway. On paper, the standard sixty-forty split might get recommended for both of them. In practice, that split would eventually fail them both. It holds enough in stocks to eventually push the first retiree into a panicked decision at the worst possible moment, and it holds enough in bonds to leave real growth on the table for the second retiree, who never needed that much protection to begin with. Neither one gets the allocation that actually fits them, because the allocation was never built around either of them specifically.

None of this shows up on a typical account statement. A statement shows balances and returns. It doesn’t show whether the money is positioned for when it’s actually needed, and it doesn’t show whether the mix matches what the person holding it can actually live through during a bad year. Those are the questions worth asking before the next rough year in the market arrives, not after it. 

Jack Strulowitz is a Financial Advisor at Bernath & Rosenberg in Cedarhurst, NY, where he helps high-net worth individuals and families manage their investments and build comprehensive strategies for retirement, tax, and estate planning. For questions or to schedule a consultation, please contact [email protected] or 847-962-3352.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.