Money Puzzle Podcast: Is the 60/40 portfolio still relevant?

Eric Douglas |

This week on The Money Puzzle Podcast today’s topic is a prevalent one and has really come into view in the last nine months. There’s definitely been a bigger significance placed on whether or not a 60/40 type of moderate portfolio, which is basically been the bedrock of our industry. Whether or not that’s going to continue to be the bedrock or the foundation of your portfolio.


Speaker 1 All right. Welcome to the Money Puzzle. I am Brian Ramsay. That is Chris Paul on right there in front and Terry Douglas here in the back. And Aaron’s on the phone. Or he’d be joining us, too. Actually, I think we got him on the next one. Anyway, so today’s first new look, we just started this morning ago when I totally forgot to talk about it. So we redid completely forgot. Oh yeah, totally forgot it. But anyway, it’s our new digs. We’re pretty excited about it. I hope that you guys like the color scheme of those that you are regular watchers anyway. So anyway, that’s that’s it’s kind of if.

Speaker 2 You don’t like the color scheme, we’re not going to redo this. It was too much work.

Speaker 1 Yeah. And, and if you don’t like it, crystal and picked it out, just.

Speaker 2 Say blame.

Speaker 1 Me. Yeah, just say it. All right. So anyway, today. So today’s topic is a pretty prevalent one, right? This is something we’ve been talking about on and off for the last 30 plus years. But it’s really come into view in the last nine months. Yeah. Do you not see that’s probably fair questioning.

Speaker 3 There’s definitely been a bigger significance placed on whether or not a 6040 type of moderate portfolio, which is basically been the bedrock of our industry. Right. Whether or not that’s going to continue to be the bedrock or the foundation of.

Speaker 2 How that’s gone.

Speaker 1 Yeah, yeah. So what what do you want of you? Why don’t you guys spend a second and explain? Well, when you say 64, it’s a lot of jargon. In our business. Sometimes you see it and people like, I don’t really know what that is. So let’s open a second.

Speaker 2 Talking about it’s very simple. When you talk about a portfolio and you see those two numbers or you hear those two numbers, the first one is could be individual securities, could be ETFs, mutual funds, anything, but it’s based on equity. So eventually, as you drill down, you’re dealing with stocks. The second number would be based on the income side. So same thing. Eventually you’re drilling down to what is essentially bonds. So historically, the way it’s done is the higher the first number in the lower the second number and they have to add up to 100. Obviously, the the higher that number is, the more aggressive the portfolio is going to be, the lower the for the first number, the more conservative it is. So that 6040 is that’s what so many people have used. Like you said, bedrock is a good word. That’s the one that everything is kind of geared towards and then you expand out from there.

Speaker 1 Okay, so give us an example like an aggressive portfolio would be.

Speaker 2 So an aggressive portfolio. Historically, you’re looking at typically about a 9010. There are some 100 zeros out there. You don’t drop to much below the 90 and still call it a really aggressive portfolio. But some people will take them down to say 80, 20 or 85, 50.

Speaker 3 And typically, I would say about an 80 and 80% allocation to stocks or stock funds is going to be pretty aggressive. Is is typically the way is to find it that 6040 is kind of defined as, you know, 60% stock stocks or stock funds, 40% bonds or fixed income assets. That’s going to be your more moderate allocation. And the idea, obviously, is that you’re taking a little bit more risk with the 60% with stock funds and then the 40% fixed income. That’s your diversifier. That’s your hedge. So what’s supposed to happen in years like this year is your hedge is supposed to zig when your stocks are zagging, right. Unfortunately, this year, everything everything has zag. Right. And that has been the occurrence to a greater degree. Every time we’ve been we’ve had market drops really over the last decade, really since oh eight, you’re seeing fixed income and more aggressive stock funds become a little bit more correlated, maybe not to the same degree, but there is an increased correlation between the performance of the two asset classes.

Speaker 2 Yeah, we’ve talked in quite a few of our podcast this year about how historically the the bonds were the safe haven when the markets were going down. And that’s where that in the 6040, that’s that 40%. So to Eric’s point this year, instead of one zigging the other one zagging, they were all correlated, they all zigged or they all zagged whatever you want to call it.

Speaker 1 And don’t you think that it was sort of like in the middle of the year this year or even earlier, like a late spring ish, where at one point everybody’s like, Oh my gosh, the stock market’s down, the stock market’s down. And really, when we dug into the performance, it was the fixed income as well is where we were, where we saw the greatest losses. And that and that’s unusual because most of the time when you have a market where there’s a little bit of trouble in equity markets, there has a tendency for flight to security or flight to safety. And what that simply means is that when you have a flight to safety is that money flows or new money or existing money has tendency to flow to different fund types, and that’s trapped. And when the markets are great and the markets are really good, there’s a flow to equity markets or the equity funds. When there’s a flight to safety, when you have trouble, markets, money flows to the fixed income market. But this this year really was one of those time periods where we struggled. Boy was it was struggling, trying to find safety anywhere.

Speaker 2 Well, and what we’ve heard, you know, all the news has. People have talked about the 60/40 dead. You’ve heard that one 2 million times this year. The problem with it is normally, yes, that flight to safety, you move to that to that income side so you don’t take the hit, which, of course, we did take the hit this year. The concern is that income side does not grow back at anywhere close to the rate that the equity side does during a good, healthy market. So that’s been the worry is when the market does recover and start going back up into a healthy bull market. The the money that you had on that income side is just not going to recover as quickly.

Speaker 3 Well, that’s and that’s always been the talking point throughout this year with with clients is when you lay out the fact that the problem this year has not been the stock market. And we’ve talked about this at length. But the problem this year has been bonds has been the bond market hands down. It’s one thing if you’re 25, 30 years old and you’ve got an aggressive portfolio and you’re down 30%. Yeah, it sucks. But no one’s going to cry a river for you. If you’re a conservative investor, you’re a year or two or maybe you’re a year or two into retirement and you’ve got that safe, balanced portfolio like you’re supposed to have. And according to history, historically speaking, always does well. Right? There’s no one no one in our position is ever going to tell you. No, that’s a bad idea. Generally speaking, to to go a little bit more conservative, not totally, but a little bit more conservative into retirement. Those portfolios have been dragged down significantly by the performance of the bond portfolio, by the bond funds in some cases, because I think some people view bonds as like this static asset. That’s not the case. You have just as much diversity within the bond portfolio or bond options as you do with in stocks. You have mid class I’m sorry, mid-cap, small cap, large cap stocks. You have international you have emerging markets, you’ve got domestic, right? You have all these different categories of stock funds. You have them all on the bond side as well within the fixed income portion, high yield treasuries, municipals. Right. You have all the international domestic, you know, short term, long term, mid-term, right. You have all the same diversity within the bond category. Right. And universally, they were all down in double digits and which is unheard of. Right. And so it’s just been a really, really rough year.

Speaker 1 Well, and I would tell you that, you know, I’ve been in the business almost 20 years, and it’s rare to see when you have the market or the economy heading to a recession, which is what we did first and second quarter of this year, we had into recession. Markets were kind of weak. Typically when you find that you have the Federal Reserve, that’s more quantitative easing or more of a dovish approach where they’re sort of lowering rates to say, hey, we’re going to kind of spur the economy along by lowering the borrowing rate or lowering rates so that the banks, in theory, would give you a lowering bar rate. Right. But what we saw was it was the opposite, right? So we had the economy slowing down or not really slowing down, I guess maybe potentially during a recession it was slowing down, but it was very slight slowing. But anyway, we’re slowing. And yet the Fed Reserve was being hawkish or being super aggressive or, you know, tightening the monetary policy. So however you want to phrase it, that that’s unheard of, we hardly ever see that. It was kind of a perfect storm, a.

Speaker 2 Perfect storm as well. It was the.

Speaker 1 Perfect storm, if you will. So that being said, we have had conversation after conversation after conversation. It’s almost every Monday morning. We talk nauseum about portfolio construction. What are we doing? What do we think? And to be honest, you know, we actually don’t know any more than anybody else. Right. We just get the same data anybody else would get access to. But we made a pretty good call back in April to limit our exposure to fixed income. We did. That was good. And then in July we made another transition in the portfolio to increase our cash position and also almost eliminate our traditional fixed income, except for a couple of small holdings, but for various reasons we held onto it, but we eliminated that piece of the portfolio to, you know, a pretty good degree. Now, our conversations have been, again, ag nauseum. I mean, it’s every week we’re having these conversations, but it is what is our view of 6040 moving forward? Because this is one of those situations that, you know, moving forward, we hope we never run into another situation like we’re in right now where, you know, the markets are kind of economy, economy’s kind of struggling, markets are kind of slow down, and yet the Federal Reserve is not being cooperative. And so so we’ve had to sort of change our thought, our process, our thought process on what does 6040 look like moving forward. We’ve had these debates for years. Eric, I know you brought this up two or three years ago. We were kind of like, oh, you know, just keep, you know, same old, same old. It’s always worked. It’s always worked. But I think we’re all starting to come on board now of, okay, maybe there’s something to this too. We sort of change our our approach to this traditional 6040 and view it more like. Risk all risk off assets. Now, that’s not a technical term that we decided to really use, but it’s something where it’s a whole placeholder. May we use it moving forward? I don’t know. But it’s a placeholder to say, what do things look like it all, but ask it this way. If we looked out five years from now, three years from now, what do you think is a traditional 6040 portfolio? What is it going to look like? What do we you know, from a risk on risk or risk off asset, what what’s that going to look like?

Speaker 2 Well, you know, hard to tell what it’s going to look like three, five years out to your point. But the things that we traditionally would use on that income side are changing. So one of the first ones that we’re looking at, as long as the Fed is being hawkish, you’re getting these, you know, very high interest rates. That’s bad if you’re borrowing, but it’s pretty good if you’re the one doing the lending. So that’s where you get into short term government bonds, for example, which are arguably as low risk an investment as you can when it comes to investment risk, because these are backed by the federal government. So historically, these were not really good investments because they just didn’t pay anything. Right now you’ve got short term T-bills paying out in excess of 4%. So that is a risk off that is paying out at a a rate that historically is a whole lot better than what you can get at the bank. So that would be the first one.

Speaker 1 You know what else?

Speaker 3 Yeah. And I think it just to piggyback on, on what you were talking about using the terms risk on, risk off, ultimately that’s what a 6040 portfolio is. Yeah. The 60 is the risk on the 40 is the risk off whatever the stock portion of your portfolio that’s always risk on. And it’s not necessarily just about risk off, it’s about volatility control as well. So I think ultimately what we’ve been trying to focus on this year is adding a little bit more volatility control into our portfolio specifically for what would constitute the risk off portion of a client’s portfolio, especially as it relates to creating an income plan as you’re entering into retirement. So to to further what you were talking about, yeah, we’ve been using a lot of short term, you know, T-bills and bonds for four and a half percent interest rate on a nine month. You know, even all these CDs right now is unheard of in my lifetime. And I was born in 81. So I guess that’s where maybe the very beginning of my lifetime when you were able to get comparable rates on short term instruments like that, but certainly not anywhere in my recent lifetime, professional working lifetime. But we’ve been looking, you know, if rates are increasing on short term government debt, they’re also increasing on things like insurance products. And I know that the bad A-word annuities write in nothing crazy or sexy about any of it. But when you look at a fixed annuity, those are the most vanilla of annuity products out there that you can look at. Once again, you can get, you know, four or five or 6% to three year, five year fixed annuities, nothing sexy, nothing crazy about it. But if you want that volatility control, it removes the volatility you’re getting the you know, you’re getting the the freedom of knowing or I guess the luxury of knowing what your return is going to look like, you know, barring, you know, an insurance company collapse or something like that, which is highly, highly, highly, highly unlikely. So, you know, once again, it’s all about adding stability or reducing the amount of volatility within your portfolio to whatever degree that might constitute that, quote, unquote, 40% of your portfolio. It’s more or less about insuring as much as we possibly can, less volatility for really the next 8 to 10 years within your portfolio as much as we possibly can. Anything beyond that is going to go back to the risk on assets, right?

Speaker 1 Yeah. The one the one piece that the one piece I would add to that is that traditionally speaking, we’ve, we’ve used the the the part of the portfolio that’s more geared for fixed income. We’ve used that as a tool to produce the income that we need to distribute out to the owner. Okay. Or. Right. Yeah. And so what we’ve now seen is that that fixed income piece, we can solve that issue by creating more assets that are more risk of mini or a great reduction in risk as opposed to traditional fixed income where we’re like, Oh, it just produces an income, we distribute income. What I think we’re moving to and this is again, this was a little bit of a debate with us is can we create a pool of money that is already cash? So there is no risk whatsoever. And maybe instead of having six months worth of cash in a portfolio or carrying 2% in cash or 3%, which is your. Traditional model, right? Right. 3% cash. 47%. Fixed income. 60%. 37%. Fixed income.

Speaker 2 Sorry, math. And like doing math.

Speaker 3 Math is.

Speaker 1 Hard. Yeah. And then 60, 60 equity, I think. I think the what what we may wind up with and again, I’m looking out to three years from now is that we have a pool of money that is either cash, cash equivalents, and it could be five or 10% of the overall portfolio. Right. Whatever the cash need is for 2 to 3 years, we want that to be cash cash equivalents. It’s not just the 2% anymore. It’s that cash is there no risk, no volatility whatsoever. So, you know that bond fund going up and down there. Now, historically speaking, they haven’t gone up, down very much, but recently it’s had huge swings. And we’re getting to the mindset of let’s just have some cash. They’re cash equivalents and we know it’s not going to make very much, but we know it’s cash and that’s the pool that generates this income, you know, and then we can have stuff that maybe we need cash three or four or five years to. Now, we can use an instrument like a Treasury bill or something like that that says that money will come due when we need it. Right. Right. And so, again, this is sort of developing. We’re continuing to have those conversations. But I think it’s really is interesting that we have we start to have these conversations with clients in the podcast watchers, just to say the old historic 6040. I think I think you might be right several years ago when you brought it up. I’m not saying it’s dead, but I’m seeing all of us demand money, have to view that differently. And I think we’re taking the right approach to say, let’s look at this a little differently. We have risky assets and we have assets that we don’t want to have a whole lot of risk, if any. And that’s what we’re what’s really what we’re trying to develop.

Speaker 2 I think the summary of that would be the 6040 is not dead, but it is changing. And the way that you traditionally would have done it is just not going to be as effective as what it once was. To Erick’s point from a couple of years ago.

Speaker 3 Yeah. I mean, we we talk a lot about the science versus art. Yeah, right. There’s a science to what we do in the science is going to dictate that, you know, obviously depending upon the situation. But if your situation calls, depending upon your risk tolerance and time horizon and all those other things, all those other factors, if a 6040 portfolio is appropriate for you, then yes, we still want to use a 6040 portfolio. What constitutes that 6040 portfolio? What we’re using for the 40, what we’re using for the 60 is constantly changing. We don’t live and we don’t live in 2019 anymore. You know, we don’t live in 2008 anymore. We don’t live in the eighties anymore. Right? The times change and we have to make sure that we’re changing and adjusting our strategies inherently within them. We can’t continue to do the same thing every single year regardless of, you know, you know, what kind of noise is going on about us. You know, it’s not like we are doing anything terribly risky or, you know, we were doing, you know, very effective things before. But if there’s a way for us to tweak what we’re doing to the smallest degree when we’re creating retirement income plans, then, yeah, we’re going to take advantage of what the market’s given us. And we’re going to we’re going to adjust as needed based upon obviously in the individual’s current situation.

Speaker 1 Yeah. So let’s just kind of wrap it up here. So any any kind of final thoughts on, you know, someone that maybe is viewing their 6040 portfolio and they’re working with somebody that’s not started had these conversations about what a 6040 portfolio might look like.

Speaker 3 Yeah. And I’ll I’ll go first because I think we just want to what I really want to hammer home is the idea of volatility control. How can we reduce volatility within your portfolio over the next 8 to 10 years? So what can we do to reduce volatility, not taking out any risk. We’re just changing the type of risk inherent in your portfolio and we’re trying to reduce that volatility as much as we possibly can. We’re not saying go all in on one strategy or go all in on the other, but given what the markets, you know, what they’re producing right now and what we anticipate will be what they’ll be giving us over the next couple of years, we’re not seeing much in the way of volatility control when it comes to what the Fed’s deciding to do every month, every quarter. They’re not showing any signs of becoming more dovish with their their policy. Hopefully they will, you know, but there’s there’s a reason that they’re doing it where you can go back to our podcast a few months ago where we talked about the the Fed’s putting us into a recession, and that’s not changing. They’re still planning to do that. We’re going to have a greater recession in 2023. And so that’s why it’s very important for us to make sure that we are eliminating volatility or reducing it as to the greatest degree that we possibly can when we’re trying to create a stable income plan.

Speaker 2 The times they are changing and that’s that’s not now that’s that never has changed if you are not making. In the changes. If you stick to the way things you’ve always done, then it’s a matter of time until that catches up with you. And I think this is a great example of it. I mean, even in our world, think about companies that were extremely powerful not that many years ago, that are virtually nonexistent, are gone now. Xerox. We used to talk about having a Xerox room.

Speaker 3 I’m going to give you a great stat in just a second. Go ahead.

Speaker 2 When’s the last time you’ve heard of Xerox? Because they didn’t adjust with times. That’s no different when it comes to the way that you invest, the way that you distribute your funds during retirement, the way that things have always worked doesn’t necessarily work anymore. And you have got to change with those and make those adjustments or you’re going to get left behind.

Speaker 3 What’s. So if you’re if you were in the eighties managing money, you were probably picking individual stocks. Absolutely. And there’s still some old school advisors that do that. We don’t really do much of that in-house. But you were talking about the giants of the industry and the giants of the industry over the last, let’s say five years have been the Fang stocks, Facebook, Apple, Amazon, Netflix, Google. Right. I saw a stat that blew me away this morning. Texas Roadhouse, local company. You know, restaurants everywhere. Right. But if you’re in Mobile, then Texas Roadhouse is based out of Louisville. Wonderful, wonderful organization. I was a server there in college. It’s fantastic. Fantastic place to go get get a good steak. Cinnamon butter rolls are awesome. Yes, they are. But over the last ten years, their stock is outperforming Google. Google has nosedived in the last year. Wow. If you look on a ten year chart, Texas Roadhouse has outperformed one of the behemoths in the industry. Not because they’re sexy, they’re not flashy. They’re just kind of slow, steady.

Speaker 2 Consistent.

Speaker 3 Consistent, consistent output over the last decade. If you were a stock picker a decade ago doing your job with all of the resources available at your disposal, no chance you would have ever chosen Texas Roadhouse over Google. Times change, things change. But you can’t look at every single you know. To your point, the greatest of giants eventually will come down. And so I found that stat super interesting. It really blew me away when I saw it today.

Speaker 2 That really got me away when you said that I would have.

Speaker 1 Never out and never again. Anyway, so that’s it for for another edition of The Money Puzzle. Make sure you tune in each and every week, which we supply material and we talk about different financial topics, usually relevant. So we’re trying to stay as relevant as we possibly can. I think we’re doing another one coming up here in a few minutes. And it’s going to be on a topic I believe we haven’t talked about yet, but I believe it’s going to be with a client meeting we had or a prospect meeting we had a couple of days ago, which is incredibly interesting. It has all kinds of different facets to it, mostly don’t don’t do very well. We’ll get more into that next week. But Eric, you want to start us off for this week?

Speaker 3 Yeah. Thanks for listening and thanks for watching. If you’re watching on YouTube, make sure you subscribe to our content. Be the first to get notified whenever we drop anything new. And of course, you can listen on on whatever podcast station that you choose to listen to. Our content were available on all available platforms, Spotify, Apple, whatever. So thanks for listening and thanks for watching. Visit our website if you like to schedule a call.