Helpful miscellaneous articles
regarding our retirement plan and planning.
Like you, I review my retirement nestegg and plan from time to
time. Recently, I went though some
continued education for some credentials I maintain and it occurred to me that
we all could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
Should I still use the
60/40 investing rule for retirement?
Published: July 24, 2020 at 10:10 a.m. ET
By Alessandra Malito
Vanguard recently defended this common
financial advice, but when does it apply to your retirement savings?
The 60/40 rule is a classic
investing strategy, but whether it’s useful is up for debate.
Not all financial advisers and investment professionals say it’s
the best choice when saving for retirement. Vanguard Group defended the
strategy in a recent note to its clients, saying the asset allocation allows
investors and their portfolios to combat volatility — such as during the
current global
pandemic. The 60/40 rule dictates 60% of the
portfolio is invested in stocks and 40% in bonds or other “safe” classes.
Comparatively, some financial services firms, such as Bank of
America BAC, have said the 60/40 rule is essentially
dead. In a research note published last year called “The End of
60/40,” Bank of America portfolio strategists said “there are good reasons to
reconsider the role of bonds in your portfolio.” Instead, investors should
focus more of their attention on equities.
Reconsidering the 60/40
construction can be a good idea for some investors. “It is a good core
portfolio that has stood the test of time, but considering the current interest
rate environment, the use of a much more highly diversified portfolio makes
more sense to mitigate risk and create more consistent expected returns for
investors,” said Thomas Rindahl, a financial adviser at Truwest Wealth
Management Services.
The investments within equities
and bonds are also crucial to determining just how effective it is in
protecting investors from steep declines while still growing. Bond exposure
alone isn’t enough to hedge against major volatility, said Matthew McKay, an
investment analyst at Briaud Financial Advisors. Treasury Bonds would be
beneficial, but corporate bonds or asset-backed securities are typically
included in selloffs in a panic. There’s also no inflation protection, or no
holdings in commodities.
The strategy is also generic,
and doesn’t take into account personal needs and factors, including age,
spending, amount already saved, and other expected retirement income, such as
Social Security or pensions, said Larry Luxenberg, a principal at Lexington
Avenue Capital Management. “Everyone should think about asset allocation but
where they end up is an individual matter,” he said. Instead of restricting a
portfolio to just two asset classes — stocks and bonds — investors should look
at those as well as other asset classes. “I argue that investing based on age
or expected retirement, while only considering two types of assets (stocks and
bonds) is a bit thoughtless,” McKay said.
The bucket approach may be better, which divides portfolios
into “buckets” for various goals that are invested differently to achieve
those aspirations, said Marguerita Cheng, chief executive officer of Blue Ocean
Global Wealth. “Sixty-forty isn’t necessarily dead per se, but cookie cutter or
template models may not work because not everyone’s situation is the same,” she
said.
Still, it’s a good starting
point. The 60/40 rule is also known as the “Goldilocks Portfolio,” said
Mackenzie Richards, a financial planner at SK Wealth Management. “Not too
risky, but not overly safe,” he said. “Something that will allow a retiree to
keep pace with the increasing cost of living.”
During volatility, having the
presence of bonds in a portfolio still prevents such steep declines from blows
to equities, said Herschel Clanton, president of Chancellor Wealth Management.
“The 60/40 portfolio still has value,” he said.
Some experts may be saying the
portfolio strategy is dead because the bull market is over, which weakens the
60% portion of the allocation, and interest rates are low, which hinders the
steady income from the 40% side, Richards added.
But that’s a nearsighted
perspective, he said. “These market prophets tend to focus on the short-term
situation, failing to think about the different market cycles that a retiree is
going to experience over the rest of their lifetime,” he said. “With these
cycles, as we have seen over the past 100 years, there is going to be
fluctuation in stock prices as well as interest rates.”
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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