December 2, 2022

Chris Ruedi: Rethinking the 60/40 portfolio for retirement | Company


Over the past few decades, many retired investors or those preparing to retire have turned to a portfolio composition that provides the opportunity for growth while maintaining some level of perceived security. The 60/40 portfolio, as it is now called, is usually made up of a mix of 60% large US company stocks and 40% US mid-tier bonds. Combining these two areas has historically produced favorable long-term results, according to Morningstar Direct.

The equity component provides opportunities for capital appreciation while the bond component has acted as something of a safety net during market downturns, with investors fleeing to bonds as a perceived safe haven. Each side of the portfolio has seen largely favorable conditions over the past 40 years.

Advances in technology, global expansions and a growing middle class have propelled stocks to higher valuations. The steady decline in bond yields boosted bond yields. When rates fall, bond prices rise.

The current economic landscape offers somewhat different conditions. We believe stocks and bonds continue to dominate investment portfolios, but other asset classes should be considered when determining the composition of the 60/40 portfolio of the future.

Alternative investments have been around in one form or another for years, but opportunities for small investors have only become possible more recently. As a result, many investors shy away from alternatives for fear of the unknown, especially compared to more “traditional” options like stocks and bonds. Many are surprised to learn that assets such as real estate, high yield bonds and emerging markets, which we all once thought of as alternatives, are now widely accepted as part of a diversified portfolio.

The inclusion of these so-called alternative asset classes can serve several purposes. For many, we believe they are best deployed as an added layer of diversification that can be particularly effective during tough market times. Some alternatives may not be subject to the same pressures that plague equity or bond investments and can potentially offer additional sources of return to an investment portfolio.

The universe of alternatives is very vast and is constantly expanding. Investments focused on reinsurance, trend following, real assets, corporate event drivers, and direct lending are just a few of the alternative asset classes commonly included.

The investment structure of each alternative varies and some may only be suitable for persons or entities who meet certain conditions. Others are available to the general public through mutual fund offerings.

Investors should keep two important aspects in mind when evaluating alternative options: liquidity and cost. Some alternatives require investors to commit funds for longer periods of time, while others offer daily prices that can be bought or sold without limitation.

Operating costs tend to be higher for these more specialized alternatives, so it is important to understand how the inclusion of these investments could impact the overall cost of the portfolio.

Investors in traditional 60/40 portfolios have had success over the past few years, but sometimes the things that get us somewhere aren’t always the best options for the future. Reinventing the 60/40 portfolio by including some alternatives can help retirees achieve their long-term goals. Start with a discussion with your financial advisor about the types of alternatives that best suit your own plan.

Savant Wealth Management (“Savant”) is an SEC-registered investment adviser headquartered in Rockford, Illinois. Past performance may not be indicative of future results. Different types of investments involve different degrees of risk. You should not assume that any discussion or information contained in this article serves as receipt or substitute for personalized investment advice from Savant.

Chris Ruedi is a financial adviser at Savant Wealth Management, Bloomington.