April 11, 2024 • 12 mins
The 60/40 strategy, which involves investing 60% in stocks and 40% in bonds, has long been a go-to for risk-averse investors. But does this approach still hold its ground in today’s fast-paced market? Stay tuned as we explore the past, present, and future of this investment strategy and determine whether it’s still a cornerstone of wealth management or if it’s time to adapt to new realities.
Here’s some of what we discuss in this episode:
- What is the 60/40 portfolio and what is its history?
- How have recent economic factors affected the effectiveness of the 60/40 strategy?
- What are the key considerations when rebalancing a portfolio, and what potential risks should investors be aware of?
WAYS TO CONNECT:
Book a 15-minute discovery call with the team here: https://calendly.com/rachel-bwg
Visit https://bulmanwealth.com/marcos-lemus to learn more about Marcos Lemus and the other members of the team.
If you have any questions about what we discussed or anything else in your financial plan, email us at ask@bulmanwealth.com. You can also reach the team by phone at (916) 458-8199.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Does the tried and true 60-40 investing approach
still hold its ground in today'sfast-paced markets?
Join us as we dissect theeffectiveness of this classic
strategy in the modern era.
From market volatility toshifting economic landscapes,
we'll uncover whether the 60-40approach remains a cornerstone
of wealth building or if it'stime to adapt to some new
(00:23):
realities.
Stay tuned as we explore thepast, present and future of this
investing strategy.
Speaker 2 (00:36):
Welcome.
You are listening to the BowmanWealth Group's Financial
Compass Podcast, a showdedicated to helping you
successfully navigate to andthrough your retirement.
Our financial compass processgoes beyond traditional holistic
financial planning.
We care as much about you andyour lifestyle as we do about
your plan.
Your hosts are Bowman WealthGroup financial advisors who,
(00:58):
for more than two decades, haveprovided financial leadership
for those they serve.
Speaker 1 (01:04):
This is Marcos Lemus.
I'm a financial advisor atBowman Wealth Group in Roseville
, california, and you'relistening to your Financial
Compass.
First of all, before we getstarted, I want to thank our
listeners for tuning in.
If this is your first timetuning in and joining us, thank
you.
If you've listened to ourpodcast before, thank you
(01:24):
certainly and welcome back.
We do appreciate all thesupport.
So, if anything sticks out andresonates with you maybe you
have questions or you've gotcomments or feedback please,
please, please, feel welcome toreach out to us at our email,
that is, ask at bullmanwealthcom.
A-s-k at Bowman Wealthcom.
(01:45):
So every episode we focus onspecific topics or some
questions that folks generallyshare from the financial realm,
and today's particular topic isthe 60-40 portfolio.
Now, what is the 60-40portfolio?
Does it still work in today'senvironment?
(02:07):
We're going to flush all ofthat out today, but before we
start, I think it's important tounderstand what it is.
What is this 60-40 investmentportfolio?
Is it broken?
What are some alternatives?
In order to do that, I have tobriefly mention some history,
really some finance history, andthis is know.
(02:30):
He argued via this theory thatrisk averse investors can create
portfolios to optimize ormaximize expected return based
(02:54):
on a given level of market risk.
So you know, maximize based onmarket risk.
Let's talk about that.
So what is the 60-40 stock bondsplit?
For a long time, it was widelyaccepted that bond prices had an
inverse or an oppositerelationship with stock prices.
(03:16):
So stocks go up, bond prices godown, but the bond yields rise.
Go down, but the bond yieldsrise, stock prices go down, bond
prices go up and the yieldsfall.
And this is safe to assume,because investors generally
(03:36):
retreat from riskier positionswhen the markets fall and they
turn to bonds as an alternative.
Right, that was kind of thethought process.
Stock market's riskier bonds aresafer during these times.
So because these bonds offeredhigher yields when their prices
are lower, it was seen as asafer bet.
Now, as the market bottomed out, bond prices would peak and
(04:00):
investors would jump back intothe stock market at that time.
So stocks rise, bond pricesfall and their yields climb back
up.
So essentially, the assumptionwas that stocks and bonds
created this balance beam ofsorts.
So the consensus is that thisis a relatively low risk
strategy that may work reallywell for people that are later
(04:21):
in their careers, you know,pre-retirees and those nearing
retirement, because this is alow risk thing so that's of
greater importance at that pointin your life, since the bull
markets usually last longer thanbear markets.
60% of the portfolio is instocks in this situation.
Right, that's where the 60comes from and that would
(04:41):
provide you a nice upside gainduring those bull market years.
Right, given that they last alittle bit longer than bear
markets.
And the other 40% that 40, thatpart of the portfolio would
offer you a little bit of upsideand yields during those bear
markets.
So we're kind of covering ourbases there.
So sounds great.
(05:02):
What went wrong?
Well, in late 2010s, somethinginteresting started to happen to
the bond and stock markets.
The markets and the economyboth came out of the 2008 global
financial crisis completely.
However, interest rates werekept pretty low by the Federal
Reserve for an extended periodof time, were kept pretty low by
(05:25):
the Federal Reserve for anextended period of time, and the
Federal Reserve chair at thetime, Janet Yellen, made that
decision to keep them low.
Some economies that were seeingextended periods of low
economic growth even after thecrisis introduced negative
interest rates, which is crazy.
Some financial regulationbecame so strict after 2008,.
There was a worry that ifinterest rates were to climb
(05:47):
back up, there'd be too muchpressure on the financial health
of the overall economy.
So the result was that stockscontinued to rise while bond
values rose right along withthem, and this, of course,
blurred that inverserelationship between stocks and
bonds that everybody was so usedto.
So when you think about this,this is great for people who had
(06:11):
60-40 portfolios.
You know they were making moneyon both sides and everything
was booming until the economicuncertainty came about, meaning
that that low risk strategywasn't as low risk anymore.
So when interest rate hikes areneeded to fight inflation which
we're seeing now, as of recentyears, you know bonds get
(06:33):
cheaper and the stock marketfalls.
Due to businesses facing highercosts of borrowing, it's not as
easy to borrow money.
Essentially, that inverserelationship between the stocks
and the bonds gets completelydestabilized, making this
balance beam that we referencedof that 60-40 portfolio not the
case anymore.
So, although there should be areturn to this inverse
(06:55):
relationship between the stocksand the bonds, there's really no
telling when or if it may comeback.
And this may be great duringthe bull market years, as I
mentioned, but of course, duringrecent years, this is doubly
costly, right?
We're seeing that now.
2022, just a couple years agowas a unique year for bonds.
(07:15):
They experienced their worstyear historically as the Fed was
aggressively raising interestrates to battle the high
inflation, and you know we'restill seeing the effects of that
now.
But think back to 2022.
Equities in the stock markethad a bad year.
Bonds were having a bad year.
(07:36):
The traditional playbook said tomove more into bonds.
Right, move our equities intobonds, which were previously
seen as safe investments.
In tough times in the economy,this wasn't a viable option in
2022, right, because both werehaving a not so great year.
So, to use an analogy, wecertainly couldn't move from a
(07:57):
hot frying pan to another hotfrying pan and, as a result,
folks needed to look elsewherefor more conservative
alternatives.
Now many advisors havealternative options or
strategies that can providesimilar diversification to this
traditional 60-40 portfoliosplit, and these are ones that
(08:17):
may not include such directexposure to bonds.
So some bond alternatives mayinclude, maybe private equity
funds, fixed index annuities,fias or other alternative
investments that can become theother side of that balance beam
that was expected to be achievedby the traditional equities
bond splits.
(08:39):
So when you think aboutrebalancing your portfolio, yeah
maybe it could be a smartdecision, but what are some
things we should be careful ofand watch out for when we're
performing a rebalance?
Well certainly tax implicationsright.
To rebalance Well certainly taximplications right If this is,
say, it's a non-qualifiedaccount, meaning a
(09:00):
non-retirement account, not a401k or an IRA.
Want to be aware of taxableevents?
and just making sure that we'recognizant of trading out of
things that maybe are up or down.
So just being aware of thatPenalties, right.
Maybe part of our rebalanceincludes a withdrawal from
(09:20):
retirement accounts of some kind.
We just want to make sure we'reaware of how am I going to
rebalance?
I think another thing is justnot being too hasty.
So if your whole savings planwas in a 60-40 portfolio and you
shift it all to a new plan,well, there's certainly no
guarantee that that new plan isgoing to be better.
If your financial plan isone-dimensional, it's all in
(09:41):
this 60-40, that's not yourbiggest issue.
The 60-40 strategy isn't yourbiggest problem there.
It's really the lack of aholistic financial plan that
addresses all of your financialneeds and goals.
So, listen, it's easy to stickto what you know, and sometimes
we know that it's best to go forwhat works rather than gamble
(10:02):
on a new thing.
But when that old way of doingthings stops working, it can be
costly to hang on to in terms ofa strategy.
When it comes to your 60-40financial plan, the downside
risk of that generic plan maybeends up costing you more than
you want to in terms of yourhard-earned savings.
And when you think about howcostly that downside is.
(10:23):
You may not want to risk yourretirement finances like that,
especially when there are somesolid alternatives that a
financial professional can helpyou with and can help you
implement.
So, again to our listeners,this has been certainly a
high-level look at thetraditional concept of the 60-40
(10:44):
portfolio split.
But again, we're just scratchingthe surface here and if you
want to dive deeper into thistopic, I encourage you to keep
an eye out for future podcasts.
Keep an eye out for ournewsletters we send out biweekly
, or ask to discuss this withyour financial advisor If
anything that you heard hereresonated with you today.
(11:05):
Maybe you've got comments,maybe you have questions or you
just want to dive deeper intoyour particular situation.
Shoot us an email and thatemail address again is ask at
bullmanwealthcom.
That's A-S-K atbullmanwealthcom.
I want to thank you all againfor listening, regardless of the
(11:26):
podcast platform you're tuningin from.
We certainly appreciate youjoining us and tuning in.
We appreciate you, weappreciate your reviews, your
feedback and, most of all, weappreciate you for giving us
your most precious asset yourtime.
Join us next time on yourfinancial compass.
Speaker 2 (12:05):
This has been your host, marcos Limas, with the
Bowman Wealth Group.
Take care, catch you next time.
Take care, catch you next time.
Purchases are subject tosuitability.
This requires a review of aninvestor's objective, risk
tolerance and time horizons.
Investing always involves riskand possible loss of capital.
Opinions expressed are solelythose of Bowman Wealth Group and
our editorial staff.
The information contained inthis material has been derived
from sources believed to bereliable, but does not guarantee
(12:26):
accuracy and completeness anddoes not report to be a complete
analysis of the materialsdiscussed.
Any statements or opinionsexpressed should in no way be
construed or interpreted assolicitation to sell or offer to
sell advisory services to anyresidents of any state other
than the states where otherwiselegally permitted.
Advisory services are offeredthrough Chris Bowman Inc.
Dba.
Bowman Wealth Group.
Registration as an investmentadvisor does not imply a certain
level of skill or training.
Insurance products and servicesare offered and sold through
Chris Bowman Inc.
(12:46):
Dba.
Bwg Insurance Agency.
Does the tried and true 60-40 investing approach
still hold its ground in today'sfast-paced markets?
Join us as we dissect theeffectiveness of this classic
strategy in the modern era.
From market volatility toshifting economic landscapes,
we'll uncover whether the 60-40approach remains a cornerstone
of wealth building or if it'stime to adapt to some new
(00:23):
realities.
Stay tuned as we explore thepast, present and future of this
investing strategy.
Speaker 2 (00:36):
Welcome.
You are listening to the BowmanWealth Group's Financial
Compass Podcast, a showdedicated to helping you
successfully navigate to andthrough your retirement.
Our financial compass processgoes beyond traditional holistic
financial planning.
We care as much about you andyour lifestyle as we do about
your plan.
Your hosts are Bowman WealthGroup financial advisors who,
(00:58):
for more than two decades, haveprovided financial leadership
for those they serve.
Speaker 1 (01:04):
This is Marcos Lemus.
I'm a financial advisor atBowman Wealth Group in Roseville
, california, and you'relistening to your Financial
Compass.
First of all, before we getstarted, I want to thank our
listeners for tuning in.
If this is your first timetuning in and joining us, thank
you.
If you've listened to ourpodcast before, thank you
(01:24):
certainly and welcome back.
We do appreciate all thesupport.
So, if anything sticks out andresonates with you maybe you
have questions or you've gotcomments or feedback please,
please, please, feel welcome toreach out to us at our email,
that is, ask at bullmanwealthcom.
A-s-k at Bowman Wealthcom.
(01:45):
So every episode we focus onspecific topics or some
questions that folks generallyshare from the financial realm,
and today's particular topic isthe 60-40 portfolio.
Now, what is the 60-40portfolio?
Does it still work in today'senvironment?
(02:07):
We're going to flush all ofthat out today, but before we
start, I think it's important tounderstand what it is.
What is this 60-40 investmentportfolio?
Is it broken?
What are some alternatives?
In order to do that, I have tobriefly mention some history,
really some finance history, andthis is know.
(02:30):
He argued via this theory thatrisk averse investors can create
portfolios to optimize ormaximize expected return based
(02:54):
on a given level of market risk.
So you know, maximize based onmarket risk.
Let's talk about that.
So what is the 60-40 stock bondsplit?
For a long time, it was widelyaccepted that bond prices had an
inverse or an oppositerelationship with stock prices.
(03:16):
So stocks go up, bond prices godown, but the bond yields rise.
Go down, but the bond yieldsrise, stock prices go down, bond
prices go up and the yieldsfall.
And this is safe to assume,because investors generally
(03:36):
retreat from riskier positionswhen the markets fall and they
turn to bonds as an alternative.
Right, that was kind of thethought process.
Stock market's riskier bonds aresafer during these times.
So because these bonds offeredhigher yields when their prices
are lower, it was seen as asafer bet.
Now, as the market bottomed out, bond prices would peak and
(04:00):
investors would jump back intothe stock market at that time.
So stocks rise, bond pricesfall and their yields climb back
up.
So essentially, the assumptionwas that stocks and bonds
created this balance beam ofsorts.
So the consensus is that thisis a relatively low risk
strategy that may work reallywell for people that are later
(04:21):
in their careers, you know,pre-retirees and those nearing
retirement, because this is alow risk thing so that's of
greater importance at that pointin your life, since the bull
markets usually last longer thanbear markets.
60% of the portfolio is instocks in this situation.
Right, that's where the 60comes from and that would
(04:41):
provide you a nice upside gainduring those bull market years.
Right, given that they last alittle bit longer than bear
markets.
And the other 40% that 40, thatpart of the portfolio would
offer you a little bit of upsideand yields during those bear
markets.
So we're kind of covering ourbases there.
So sounds great.
(05:02):
What went wrong?
Well, in late 2010s, somethinginteresting started to happen to
the bond and stock markets.
The markets and the economyboth came out of the 2008 global
financial crisis completely.
However, interest rates werekept pretty low by the Federal
Reserve for an extended periodof time, were kept pretty low by
(05:25):
the Federal Reserve for anextended period of time, and the
Federal Reserve chair at thetime, Janet Yellen, made that
decision to keep them low.
Some economies that were seeingextended periods of low
economic growth even after thecrisis introduced negative
interest rates, which is crazy.
Some financial regulationbecame so strict after 2008,.
There was a worry that ifinterest rates were to climb
(05:47):
back up, there'd be too muchpressure on the financial health
of the overall economy.
So the result was that stockscontinued to rise while bond
values rose right along withthem, and this, of course,
blurred that inverserelationship between stocks and
bonds that everybody was so usedto.
So when you think about this,this is great for people who had
(06:11):
60-40 portfolios.
You know they were making moneyon both sides and everything
was booming until the economicuncertainty came about, meaning
that that low risk strategywasn't as low risk anymore.
So when interest rate hikes areneeded to fight inflation which
we're seeing now, as of recentyears, you know bonds get
(06:33):
cheaper and the stock marketfalls.
Due to businesses facing highercosts of borrowing, it's not as
easy to borrow money.
Essentially, that inverserelationship between the stocks
and the bonds gets completelydestabilized, making this
balance beam that we referencedof that 60-40 portfolio not the
case anymore.
So, although there should be areturn to this inverse
(06:55):
relationship between the stocksand the bonds, there's really no
telling when or if it may comeback.
And this may be great duringthe bull market years, as I
mentioned, but of course, duringrecent years, this is doubly
costly, right?
We're seeing that now.
2022, just a couple years agowas a unique year for bonds.
(07:15):
They experienced their worstyear historically as the Fed was
aggressively raising interestrates to battle the high
inflation, and you know we'restill seeing the effects of that
now.
But think back to 2022.
Equities in the stock markethad a bad year.
Bonds were having a bad year.
(07:36):
The traditional playbook said tomove more into bonds.
Right, move our equities intobonds, which were previously
seen as safe investments.
In tough times in the economy,this wasn't a viable option in
2022, right, because both werehaving a not so great year.
So, to use an analogy, wecertainly couldn't move from a
(07:57):
hot frying pan to another hotfrying pan and, as a result,
folks needed to look elsewherefor more conservative
alternatives.
Now many advisors havealternative options or
strategies that can providesimilar diversification to this
traditional 60-40 portfoliosplit, and these are ones that
(08:17):
may not include such directexposure to bonds.
So some bond alternatives mayinclude, maybe private equity
funds, fixed index annuities,fias or other alternative
investments that can become theother side of that balance beam
that was expected to be achievedby the traditional equities
bond splits.
(08:39):
So when you think aboutrebalancing your portfolio, yeah
maybe it could be a smartdecision, but what are some
things we should be careful ofand watch out for when we're
performing a rebalance?
Well certainly tax implicationsright.
To rebalance Well certainly taximplications right If this is,
say, it's a non-qualifiedaccount, meaning a
(09:00):
non-retirement account, not a401k or an IRA.
Want to be aware of taxableevents?
and just making sure that we'recognizant of trading out of
things that maybe are up or down.
So just being aware of thatPenalties, right.
Maybe part of our rebalanceincludes a withdrawal from
(09:20):
retirement accounts of some kind.
We just want to make sure we'reaware of how am I going to
rebalance?
I think another thing is justnot being too hasty.
So if your whole savings planwas in a 60-40 portfolio and you
shift it all to a new plan,well, there's certainly no
guarantee that that new plan isgoing to be better.
If your financial plan isone-dimensional, it's all in
(09:41):
this 60-40, that's not yourbiggest issue.
The 60-40 strategy isn't yourbiggest problem there.
It's really the lack of aholistic financial plan that
addresses all of your financialneeds and goals.
So, listen, it's easy to stickto what you know, and sometimes
we know that it's best to go forwhat works rather than gamble
(10:02):
on a new thing.
But when that old way of doingthings stops working, it can be
costly to hang on to in terms ofa strategy.
When it comes to your 60-40financial plan, the downside
risk of that generic plan maybeends up costing you more than
you want to in terms of yourhard-earned savings.
And when you think about howcostly that downside is.
(10:23):
You may not want to risk yourretirement finances like that,
especially when there are somesolid alternatives that a
financial professional can helpyou with and can help you
implement.
So, again to our listeners,this has been certainly a
high-level look at thetraditional concept of the 60-40
(10:44):
portfolio split.
But again, we're just scratchingthe surface here and if you
want to dive deeper into thistopic, I encourage you to keep
an eye out for future podcasts.
Keep an eye out for ournewsletters we send out biweekly
, or ask to discuss this withyour financial advisor If
anything that you heard hereresonated with you today.
(11:05):
Maybe you've got comments,maybe you have questions or you
just want to dive deeper intoyour particular situation.
Shoot us an email and thatemail address again is ask at
bullmanwealthcom.
That's A-S-K atbullmanwealthcom.
I want to thank you all againfor listening, regardless of the
(11:26):
podcast platform you're tuningin from.
We certainly appreciate youjoining us and tuning in.
We appreciate you, weappreciate your reviews, your
feedback and, most of all, weappreciate you for giving us
your most precious asset yourtime.
Join us next time on yourfinancial compass.
Speaker 2 (12:05):
This has been your host, marcos Limas, with the
Bowman Wealth Group.
Take care, catch you next time.
Take care, catch you next time.
Purchases are subject tosuitability.
This requires a review of aninvestor's objective, risk
tolerance and time horizons.
Investing always involves riskand possible loss of capital.
Opinions expressed are solelythose of Bowman Wealth Group and
our editorial staff.
The information contained inthis material has been derived
from sources believed to bereliable, but does not guarantee
(12:26):
accuracy and completeness anddoes not report to be a complete
analysis of the materialsdiscussed.
Any statements or opinionsexpressed should in no way be
construed or interpreted assolicitation to sell or offer to
sell advisory services to anyresidents of any state other
than the states where otherwiselegally permitted.
Advisory services are offeredthrough Chris Bowman Inc.
Dba.
Bowman Wealth Group.
Registration as an investmentadvisor does not imply a certain
level of skill or training.
Insurance products and servicesare offered and sold through
Chris Bowman Inc.
(12:46):
Dba.
Bwg Insurance Agency.
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