60-40 Portfolio Won't Prepare Investors for Retirement
Moderator: Global Moderator
60-40 Portfolio Won't Prepare Investors for Retirement
Interesting article. Not only does the author bash the Bogleheads 60/40 portfolio (without mentioning Bogleheads) but he seems to be recommending a Permanent Portfolio without mentioning it (or perhaps even knowing what it is)
-----------------
https://www.newsmax.com/t/newsmax/article/987093/8
The 60/40 allocation, consisting 60% equities, 40% fixed income, is a standard asset allocation in many retirement plans. Risk parity funds are essentially a leveraged version of the 60/40 portfolio.
This portfolio and slight modifications of it have performed remarkably well in recent years. However, market history shows this is unlikely to work as well as the macroeconomic environment changes. Indeed the 60/40 portfolio might be the riskiest allocation option for investors hoping to retire in the coming decades.
Interest Rates
In the U.S., rates have generally trended downwards for the past 40 years, boosting valuations for both equities and fixed income. Over 90% of the price appreciation for the standard 60/40 portfolio over the past 90 years occurred between 1984 and 2007. With rates at near zero, the tailwind that supported fixed income is gone. It’s unlikely the next four decades will be like the last four decades.
The 60/40 portfolio works poorly during time periods where interest rates stay at or near the zero bound. During the 1990s, Japanese retirees attempting to live off a 60/40 portfolio allocation with domestic assets would have run out of money as the central bank kept rates low attempting to stimulate the economy. In the U.S. during the 1930s great depression interest rates stayed near then historically low levels, and the 60/40 portfolio experienced a 78% drawdown.
The current setup leaves few investors prepared for a macro regime shift that is likely imminent.
Macro Regime Shifts
Recent research from Deutsche Bank asserts that a major structural change in the global economy is about to occur, ending the prior era of globalization that lasted from 1980-2020, and entering a new era of disorder. Paul McCulley, a former managing director and chief economist at Pacific Investment Management Co, has also argued we are “unambiguously on the cusp of a major change in the economy. He also stated that if 60/40 works over the next four decades, democracy has failed. This is relevant because macro regime shifts can upend a traditional 60/40 portfolio.
In the late 1960s pressures built up in the Bretton Woods system until it broke in 1971, untethering the dollar from gold, and creating a purely fiat monetary system. During the high inflation 1970s, investors experienced large real losses in both stocks and bonds.
Equities suffered a brutal bear market, and bonds were known as “certificates of confiscation” because their nominal yields couldn’t keep up with inflation rate. The 60/40 portfolio provided no diversification or protection. In the coming era, the situation might be worse. Since risk parity funds are highly leveraged, their unwinding could create a feedback loop amplifying any drawdowns.
Diversification Illusion
Investors often naively assume that a balanced mix of stocks and bonds will provide a natural diversification during times of turmoil. Yet, contrary to popular belief, the 60/40 portfolio doesn’t provide adequate diversification. According to research by Artemis Capital, since 1880, stocks and bonds have had a positive correlation for often they’ve had a negative correlation. Indeed, there have been multiple periods where stocks and bonds both declined at the same time. Examples include, the 1970s, the late 1950s, the 1940s, and from 1906-1909. Few financial advisors working today have ever experienced any of these periods.
Alternatives to 60/40
So, what can investors do? Unfortunately, there isn’t an easy answer. Diversifying internationally can help avoid overexposure to the arguably overvalued U.S. market.
However, finding truly non-correlated sources of risk and return requires going beyond traditional stock and bond allocations.
To truly diversify a portfolio for the long term, investors need to maintain an alternative investment allocation. Funds focused on commodities, precious metals, volatility, and global macro require heightened due diligence up front, but are likely to be essential in the long term. Strategies that seem risky might be the only way to protect against the risk of doing the same thing for the next 40 years.
-----------------
https://www.newsmax.com/t/newsmax/article/987093/8
The 60/40 allocation, consisting 60% equities, 40% fixed income, is a standard asset allocation in many retirement plans. Risk parity funds are essentially a leveraged version of the 60/40 portfolio.
This portfolio and slight modifications of it have performed remarkably well in recent years. However, market history shows this is unlikely to work as well as the macroeconomic environment changes. Indeed the 60/40 portfolio might be the riskiest allocation option for investors hoping to retire in the coming decades.
Interest Rates
In the U.S., rates have generally trended downwards for the past 40 years, boosting valuations for both equities and fixed income. Over 90% of the price appreciation for the standard 60/40 portfolio over the past 90 years occurred between 1984 and 2007. With rates at near zero, the tailwind that supported fixed income is gone. It’s unlikely the next four decades will be like the last four decades.
The 60/40 portfolio works poorly during time periods where interest rates stay at or near the zero bound. During the 1990s, Japanese retirees attempting to live off a 60/40 portfolio allocation with domestic assets would have run out of money as the central bank kept rates low attempting to stimulate the economy. In the U.S. during the 1930s great depression interest rates stayed near then historically low levels, and the 60/40 portfolio experienced a 78% drawdown.
The current setup leaves few investors prepared for a macro regime shift that is likely imminent.
Macro Regime Shifts
Recent research from Deutsche Bank asserts that a major structural change in the global economy is about to occur, ending the prior era of globalization that lasted from 1980-2020, and entering a new era of disorder. Paul McCulley, a former managing director and chief economist at Pacific Investment Management Co, has also argued we are “unambiguously on the cusp of a major change in the economy. He also stated that if 60/40 works over the next four decades, democracy has failed. This is relevant because macro regime shifts can upend a traditional 60/40 portfolio.
In the late 1960s pressures built up in the Bretton Woods system until it broke in 1971, untethering the dollar from gold, and creating a purely fiat monetary system. During the high inflation 1970s, investors experienced large real losses in both stocks and bonds.
Equities suffered a brutal bear market, and bonds were known as “certificates of confiscation” because their nominal yields couldn’t keep up with inflation rate. The 60/40 portfolio provided no diversification or protection. In the coming era, the situation might be worse. Since risk parity funds are highly leveraged, their unwinding could create a feedback loop amplifying any drawdowns.
Diversification Illusion
Investors often naively assume that a balanced mix of stocks and bonds will provide a natural diversification during times of turmoil. Yet, contrary to popular belief, the 60/40 portfolio doesn’t provide adequate diversification. According to research by Artemis Capital, since 1880, stocks and bonds have had a positive correlation for often they’ve had a negative correlation. Indeed, there have been multiple periods where stocks and bonds both declined at the same time. Examples include, the 1970s, the late 1950s, the 1940s, and from 1906-1909. Few financial advisors working today have ever experienced any of these periods.
Alternatives to 60/40
So, what can investors do? Unfortunately, there isn’t an easy answer. Diversifying internationally can help avoid overexposure to the arguably overvalued U.S. market.
However, finding truly non-correlated sources of risk and return requires going beyond traditional stock and bond allocations.
To truly diversify a portfolio for the long term, investors need to maintain an alternative investment allocation. Funds focused on commodities, precious metals, volatility, and global macro require heightened due diligence up front, but are likely to be essential in the long term. Strategies that seem risky might be the only way to protect against the risk of doing the same thing for the next 40 years.
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
Yep! Love how Harry Browne picked up where this article left off.
I am nervous about the 60/40 that I've got in my active retirement accounts. I would switch it to a PP in a heartbeat if my retirement plan permitted gold investment (i.e. a brokerage window). Once I retire and/or have access to that money, it'll become a PP in an IRA literally the next day.
I am nervous about the 60/40 that I've got in my active retirement accounts. I would switch it to a PP in a heartbeat if my retirement plan permitted gold investment (i.e. a brokerage window). Once I retire and/or have access to that money, it'll become a PP in an IRA literally the next day.
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
I'm assuming it isn't possible to roll over your current savings into an IRA and continue making new contributions into the retirement plan?sophie wrote: ↑Fri Sep 18, 2020 11:16 am Yep! Love how Harry Browne picked up where this article left off.
I am nervous about the 60/40 that I've got in my active retirement accounts. I would switch it to a PP in a heartbeat if my retirement plan permitted gold investment (i.e. a brokerage window). Once I retire and/or have access to that money, it'll become a PP in an IRA literally the next day.
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
Sadly no. I keep asking if in-service rollovers are allowed just in case the answer changes...it would certainly be helpful to roll it into my solo 401K which would allow me to continue making back-door Roth contributions.
- vnatale
- Executive Member
- Posts: 9474
- Joined: Fri Apr 12, 2019 8:56 pm
- Location: Massachusetts
- Contact:
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
It is possible if you are 59 1/2 AND your plan allows it.Xan wrote: ↑Fri Sep 18, 2020 11:25 amI'm assuming it isn't possible to roll over your current savings into an IRA and continue making new contributions into the retirement plan?sophie wrote: ↑Fri Sep 18, 2020 11:16 am Yep! Love how Harry Browne picked up where this article left off.
I am nervous about the 60/40 that I've got in my active retirement accounts. I would switch it to a PP in a heartbeat if my retirement plan permitted gold investment (i.e. a brokerage window). Once I retire and/or have access to that money, it'll become a PP in an IRA literally the next day.
https://www.401krollover.com/what-is-in ... over-plan/
Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
- mathjak107
- Executive Member
- Posts: 4456
- Joined: Fri Jun 19, 2015 2:54 am
- Location: bayside queens ny
- Contact:
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
Most plans don’t allow in service rollovers
- vnatale
- Executive Member
- Posts: 9474
- Joined: Fri Apr 12, 2019 8:56 pm
- Location: Massachusetts
- Contact:
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
I'm working with one that is. And, when I was looking for a retirement plan for my employer within the last year, if we'd chosen a 401(k), I would have allowed it.
What are the reasons why you believe an employer would not want to allow it?
Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
I hold a few shares of a low cost 60/40 balanced fund just for fun. I think with international diversification they should do fine. High valuations in U.S. stocks and bonds can be at least partially ameliorated with international allocations.
DITM
www.allterraininvesting.com
www.allterraininvesting.com
- mathjak107
- Executive Member
- Posts: 4456
- Joined: Fri Jun 19, 2015 2:54 am
- Location: bayside queens ny
- Contact:
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
what the company has access to as far as companies to administer the 401k plan are more limited since many will not handle small plans and the biggest problem is your costs are based on plan size so they dont want money leaving the plan .
years ago when we started our company 401k we were to small for fidelity to administer. we had to turn to merril lynch to administer it and their fees were high . fidelity i think had a 1 millon dollar min at the time .
so keeping the company 401k as high as possible is in their best interest .
- vnatale
- Executive Member
- Posts: 9474
- Joined: Fri Apr 12, 2019 8:56 pm
- Location: Massachusetts
- Contact:
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
Things have changed considerably from years ago. One of the options I was looking at was a 401(k) with Vanguard. There were no minimums.mathjak107 wrote: ↑Sat Sep 19, 2020 3:35 amwhat the company has access to as far as companies to administer the 401k plan are more limited since many will not handle small plans and the biggest problem is your costs are based on plan size so they dont want money leaving the plan .
years ago when we started our company 401k we were to small for fidelity to administer. we had to turn to merril lynch to administer it and their fees were high . fidelity i think had a 1 millon dollar min at the time .
so keeping the company 401k as high as possible is in their best interest .
Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
- mathjak107
- Executive Member
- Posts: 4456
- Joined: Fri Jun 19, 2015 2:54 am
- Location: bayside queens ny
- Contact:
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
you are not following ... it is not a fund minimum for you ... i am talking about the fact who your company can go to to administer the plan is based on the plan total size . what your company pays to administer the plan is also tied to total dollars in the company planvnatale wrote: ↑Sat Sep 19, 2020 8:53 amThings have changed considerably from years ago. One of the options I was looking at was a 401(k) with Vanguard. There were no minimums.mathjak107 wrote: ↑Sat Sep 19, 2020 3:35 amwhat the company has access to as far as companies to administer the 401k plan are more limited since many will not handle small plans and the biggest problem is your costs are based on plan size so they dont want money leaving the plan .
years ago when we started our company 401k we were to small for fidelity to administer. we had to turn to merril lynch to administer it and their fees were high . fidelity i think had a 1 millon dollar min at the time .
so keeping the company 401k as high as possible is in their best interest .
Vinny
- vnatale
- Executive Member
- Posts: 9474
- Joined: Fri Apr 12, 2019 8:56 pm
- Location: Massachusetts
- Contact:
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
I am following. I spent an unbelievable amount of time researching all retirement options for my employer last fall / winter. And, I understand exactly what you are saying. The whole market place changed from when you were last involved.mathjak107 wrote: ↑Sat Sep 19, 2020 1:03 pmyou are not following ... it is not a fund minimum for you ... i am talking about the fact who your company can go to to administer the plan is based on the plan total size . what your company pays to administer the plan is also tied to total dollars in the company planvnatale wrote: ↑Sat Sep 19, 2020 8:53 amThings have changed considerably from years ago. One of the options I was looking at was a 401(k) with Vanguard. There were no minimums.mathjak107 wrote: ↑Sat Sep 19, 2020 3:35 amwhat the company has access to as far as companies to administer the 401k plan are more limited since many will not handle small plans and the biggest problem is your costs are based on plan size so they dont want money leaving the plan .
years ago when we started our company 401k we were to small for fidelity to administer. we had to turn to merril lynch to administer it and their fees were high . fidelity i think had a 1 millon dollar min at the time .
so keeping the company 401k as high as possible is in their best interest .
Vinny
I found out this place from someone in the forum and we were all set to go with them until we decided to go the simplest way possible - a SIMPLE IRA with Vanguard.
https://www.employeefiduciary.com/
Look at their pricing. With them you can offer almost any investing option for your employees. It all comes down to plan design, including the in-service option.
Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
- mathjak107
- Executive Member
- Posts: 4456
- Joined: Fri Jun 19, 2015 2:54 am
- Location: bayside queens ny
- Contact:
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
here are some of the negatives to in service distributions
https://www.financialfinesse.com/2018/0 ... your-401k/
https://www.financialfinesse.com/2018/0 ... your-401k/
- vnatale
- Executive Member
- Posts: 9474
- Joined: Fri Apr 12, 2019 8:56 pm
- Location: Massachusetts
- Contact:
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
Yes. I don't think you'd ever WANT to do it prior to 59 1/2. But afterwards, what could be the downside? Once you get it into your own IRA you can invest it any way that you want as opposed to being restricted to whatever your employer's plan allows.mathjak107 wrote: ↑Sun Sep 20, 2020 3:42 am here are some of the negatives to in service distributions
https://www.financialfinesse.com/2018/0 ... your-401k/
I do note the four reasons the article lists but for most on this list I'd assume that the ability to have full control over your investment choices would far outweigh the possibilities of reaping any benefit from those four. But this is good information in case any of those four reason COULD possibly apply to someone or something valued. In my case, I'd make the in-service withdrawal.
Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
- mathjak107
- Executive Member
- Posts: 4456
- Joined: Fri Jun 19, 2015 2:54 am
- Location: bayside queens ny
- Contact:
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
i am in the process of moving mine ...i had a one day a week job and threw my pay in the 401k and got matching . but that job ended with covid ...so friday i requested transfer papers
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
I have the same issue.
It will have to wait until the job ends. IRA is in a PP tho.
Re: 60-40 Portfolio Won't Prepare Investors for Retirement
That sound similar to a Bogleheads 3-tiered portfolio.