Opinion: Putting all your money into stocks like a CNBC anchor advocates is a bad idea: In defense of the 60/40 portfolio

Market Watch ^ | 12/24/2019 | Mark Hulbert

[SeekAndFind]

I rise, your Honor, in defense of the 60/40 portfolio.

I do so to counter the growing consensus that the standard asset allocation of 60% equities and 40% bonds is “dead.” Just last week, CNBC anchor Becky Quick added her voice to this chorus, saying that “you’re never going to make enough money if you have 40% of your money in bonds.” Earlier this fall, Bank of America declared the “end” of the 60/40 portfolio.

To be sure, no one is denying that the 60/40 portfolio has a stellar long-term track record. Consider its performance since 1926, according to calculations I made using data from Morningstar:

	Annualized returns 1926-2018	Standard deviation of yearly returns
100% S&P 500 (with dividends)	10.0%	19.7%
60% S&P 500 / 40% long-term Treasuries	8.8%	12.5%
60% S&P 500 / 40% intermediate-term Treasuries	8.5%	12.0%

In other words, while immunizing investors from nearly 40% of the volatility or risk of an all-equity portfolio SPX, -0.02%

, the 60/40 portfolio forfeited either 1.2 or 1.5 annualized percentage points (depending on whether the 40% bond portfolio was invested in long-term or intermediate-term Treasuries).

That’s not a bad trade-off, and the 60/40 portfolio far outperforms the all-equity portfolio on a risk-adjusted basis.

[SeekAndFind]

The impact of low rates

The reason the 60/40 portfolio has fallen out of favor, of course, is today’s rock-bottom interest rates. Bond prices will fall if and when interest rates rise.

Nevertheless, even though this narrative does have a certain superficial plausibility, it doesn’t withstand much scrutiny.

Let’s start by reviewing the historical record. In the decades following particularly low interest rates, for example, the 60/40 portfolio has performed quite well — as you can see from the table below.

	Average annualized return over subsequent decade
	100% stock portfolio	60% stock / 40% long-term Treasuries	60% stock / 40% intermediate-term Treasuries
The 20% of years since 1926 with the lowest 10-year Treasury yields	16.0%	10.6%	10.6%
The 20% of years since 1926 with the highest 10-year Treasury yields	15.0%	13.5%	13.0%
Decade after 1941	17.3%	11.4%	11.2%

To be sure, the current anti-60/40 rationale does receive some support in the data, since the return spread between the all-stock and the 60/40 portfolios is wider following years in which interest rates were particularly low. Nevertheless, the 60/40 portfolios still produced outstanding returns.

[Flash Bazbeaux]

One investing rule of thumb that will never go out of favor, but will cost lots of people their fortunes, is “This time it’s different.”

The most recent peak in popularity for this investing rule was around 2006. Maybe it’s due for a comeback.

[SecAmndmt]

How much of the return on stocks has been produced via Fed easy money policies?

I’ve lost a lot of confidence in stocks. Personally I’d rather have a mix of real estate, stocks, bonds, gold and cash.

If we had a currency fix to gold or a basket of commodities, as opposed to fiat currency how would the picture look? Less money transferred to the financial class, and more wealth for a larger middle class?

[plain talk]

There is no 60/40 investing rule nor has there even been one.

A stock/bond ratio should vary by individual depending on ones age, financial situation, risk tolerance, etc.

[Vermont Lt]

They were not providing “free money” through the Fed in 1926-2007. Applying statistics for that time period is dangerous.

I don’t know what the answer is, but going all-in at this stage of an expansion seems reckless.

[entropy12]

Correct!! Rules cannot be cast in concrete by ignoring interest levels. Food & medical care costs are rising 4 times higher than the 1.6% raise passed on to social security recipients.

[onona]

Double Correct !!

Medical Cost Inflation is 6% per YEAR.

Let that marinate, folks

[chuckles]

With the 10 year paying less than 2%, one might think that at some point the rate will rise to say 4-5%. That would be quite a loss in bond value. But the problem is, IMHO, that we will never see those rates again as long as we owe $23 trillion. The interest debt would be above a trillion a year if we hit 5-6% ever again. That cannot be allowed to happen. If there isn't a good faith effort to cut spending or at least lower the debt, higher rates will not be allowed to happen. Investing in a dividend bearing account of say ATT, XOM, PFE, maybe a real estate trust, and maybe a couple more paying over 4%, would be safer than buying bonds and hoping for 1% rate. If they are larger companies, the possibility of them losing 100% would be slim. There have been in the past GM, BTU, and a few others, but having 3-4 out of 8 at the same time is slim.

Back when rates were 5-6% in the old days, a bond portfolio was necessary to balance risk in the market. When stocks were down, the bonds would go up, and vice versa.

[The Duke]

I've been studying investments lately and one thing I've learned is that, in the event of a crash/correction, it typically takes 8-10 years for a stock to return to it's pre-crash price (and by that time inflation has significantly reduced its value).

Also, if Tech Lead can't make a buck on stocks, I'm not sure I would fare any better. :(

[poinq]

You can do all the historical charts you want. But there is no upside to bonds. You get little to no coupon. And bond funds can lose principal value. Its true that they have gone up from the 1970’s to now. But with interest rates pinned close to zero, bonds are risky. I suggest you take the bond portion of your portfolio and put it cash or some cash equivalent like money market, GIC, or CD. Its ok to avoid risk with a portion of your portfolio. Buying Bonds (or worse, bond funds)is not avoiding risk at all.

[SeekAndFind]

I would say, if you can wait, buy bonds of investment grade companies that pay good coupon rates and either hold them till maturity, or sell when the bond price goes way above the price you bought.

For instance, Ford Motors paid over 4% coupon rate for a 10 year bond.

That, I think is a safe investment.

[rstrahan]

Risk avoidance is fine if you want to set back and ignore your portfolio. However, if you pay even a modicum of attention to your portfolio, you can load everything into stocks, and roll with the bulls. If there is a downturn, you can flip your portfolio the other direction and not take the big loss that money managers can generate by using the ‘dont Worry, this is just a blip’.

[jdsteel]

I currently fear interest rate risk more than I fear market risk.

To buy a bond to make such insignificant interest in return for the risk is not a good bet.

[EQAndyBuzz]

I stick to mutual funds. My 2025 stock fund is doing really well. This year alone it is up almost 20%. I’ll take numbers like this any day. If someone beats Trump, I’ll move money to bonds to minimize the risk.

[chuckles]

I had a long answer all typed out going between my Schwab account and FR giving real world examples and then I accidentally killed FR and lost it, So I'll try again, but it will be estimates.

First you pick a high paying dividend stock you wouldn't mind owning. I will use XOM as an example. Back in Oct, I sold 5 puts for strike 66 and 5 more at strike 68 expiring in Nov. If they put the stock to me I would capture the dividend paying 5% because they would put it to me before the ex dividend. The premium was around 1.65 for the 66 and 1.75 for the 68. I ended up buying both back before Nov at under 60 cents because I had made more than the dividend without owning the stock. I then bought 500 shares before the ex dividend and sold 5 $70 calls expiring in Jan @1.52. I also sold 5 Jan 67.50 puts @ 1.20. I collected the 5% divy and will get $70 + 1.52 for the call as it looks like it might be called away in Jan. The 67.5 put will expire worthless if that happens. I'm willing to own up to 2k shares of XOM as long as my price is less than 70 just for the dividends. I will sell more puts below 70 and 66-67 is a steal IMO.

Notice all I do is sell puts and calls, never buy unless I'm closing a short position for a profit. I do this over and over all year long and am making over 20% a year. I have other stocks like AT&T and do the same. I try to get put premiums over the dollar amount of the dividend, such as .87 for XOM and .52 for T. That way if the stock is called away or put to me, I get the equivalent or more of the dividend without owning the stock.

I hope that makes sense. A large company plus a large dividend, that moves enough to make reasonable option premiums is all you need. Study the charts and see what a reasonable price would be during the year. Nasdaq stocks move a lot, but most pay no or very little dividends. Many old time Dow stocks fit the profile. I try to find one paying above 3%, the more the better up to about 6%. After that, there is a reason they pay 6% or above that is not good. XOM is my favorite.

Selling premium and collecting dividends is a reasonable way to draw more than 10% or more on your money. A company that cuts it's dividend is a killer for this. Awhile back COP cut their div and I was underwater for a couple of years.

Oh, and vote for Trump to look like a genius.