Is the 60/40 Portfolio Still Relevant?

What is a 60/40 portfolio?

Watch as Erin Kennedy and Wes White from Patriot Wealth discuss the 60/40 portfolio model and its effectiveness in the current market. The 60/40 model refers to a balanced approach where 60% of the portfolio is invested in growth-oriented assets and 40% in fixed-income assets like bonds. Wes White explains that while he feels better about the 60/40 model now compared to a year ago, risks are still involved, particularly in rising interest rates. Bonds, which make up the portfolio’s 40% fixed income portion, can experience volatility when interest rates rise.

He also suggests alternative strategies to manage this risk, such as using structured income notes that provide income without interest rate risk, transferring risk to an insurance company through annuities, or using options to generate income without interest rate risk. Traditional bonds may become more attractive as interest rates rise. White emphasizes the importance of working with an independent advisor who can access various tools and adapt the portfolio strategy to changing market conditions.

Wes White and his team at Patriot Wealth believe no two retirements are equal. So, no two retirement plans should be either. They will walk you through the critical steps to craft a customized retirement plan tailored to your goals. They offer the patriot advantage for retirement, having emotion-free investing, transparency, and the highest standards of practice. You can plan smarter and live better with Patriot Wealth today.

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Transcript:

Erin Kennedy (00:16):

Hello and welcome to Retirement Wealth Academy. I’m your host, Erin Kennedy. Thanks for being with us. This show is dedicated to helping retirees and pre-retirees sort through the very complicated topics and questions surrounding retirement. And for the answers, we turn to local experts. Today, we have Wes White. Wes, good to see you again.

Wes White (00:34):

Good to see you.

Erin Kennedy (00:34):

I’m glad you’re here because I wanted to talk through the 60/40 portfolio, which has been through the ringer. I want to know if it’s good enough. What is your take on the 60/40 model right now?

Wes White (00:44):

Well, first and foremost, what is a 60/40 model? That is a balanced kind of approach, right? It’s a very common way to have exposure to the broad markets where basically you’ve got about 60% in growth oriented assets and the remaining in some sort of fixed income kind of strategy like bonds. But right now I feel better about it than I did a year ago-

(01:06):

… that’s for sure. But with that being said, that doesn’t mean that all the risk as far as what a 60/40 brings is totally gone, and we’re good to go moving forward, because what the 60/40 kind of struggles with there is in the interest rate kind of environment like we’ve experienced over the last 18 months, where we’ve got interest rates that are coming up .that 40 side to our portfolio that’s exposed to bonds, well, while their yield is going up, their par value is going down.

(01:33):

And so that creates a lot of volatility in a portfolio, especially when equities are going down with it. So the original thought is, “Okay, we’ve got this fixed income side. If equities get a little volatile, our stabilizer is going to be those bonds.” It’ll help us sleep good at night and emotionally be able to stay committed to our plans. But 2022, if that taught investors anything, it’s expect the unexpected.

(01:55):

Because that was a really nasty year for bonds. And in fact, if you were to hold just last year, a equal weight of 1 to 30 year treasuries, you would’ve experienced a drawdown or market loss at one point of 35%. And that’s supposed to be the safest asset.

Erin Kennedy (02:11):

That’s really stressful.

Wes White (02:13):

Yeah. Very, very stressful. So we have to begin to think outside the box.

(02:16):

How do we manage some of that risk? And so there are things that we can do as investors and those advisors that have access to things that is, what we refer to as kind of like the open architecture, meaning the world is your oyster and you can build some really cool things. You can use specialized tools like structured income notes that provide the income that we want, like we get from bonds, but they don’t carry any interest rate risk. Now, that doesn’t mean they’re not risk-free because there’s some issuer risks there and things we have to be aware of there, but they’re kind of unique tools. There’s very many different kinds that you could use. So again, that’s just one example. Another thing, Erin, that we could do is instead of just holding on to all the interest rate sensitive kind of bonds, we can transfer a portion of that risk to an insurance company. And that can come in the form of an annuity, that’s one example. Something that is maybe a fixed rate or something that is tied to an index to grow with it. So, there’s various things.

Erin Kennedy (03:15):

So those are things that you would consider bond alternatives. Are there any other alternatives that you would recommend?

Wes White (03:20):

There’s some pretty innovative tools too, where you can use options and it can be simplified. So you can buy one fund and it can have options inside of it. And it’s designed to not necessarily get all of the up that the market has to offer, but provide income back to you using that option kind of strategy. That also does not have interest rate risk.

Erin Kennedy (03:41):

So you mentioned interest rate risk before, and we know the Federal Reserve is probably going to raise interest rates two more times this year. At least that’s what they’re predicting. How do you compensate then for interest rate risk?

Wes White (03:54):

Well, if interest rates are going up, that means that, again, the yield on our bonds is a little bit more attractive at this point. So because we know that, or they’ve told us that they think there’s going to be a bit of a pause and maybe a couple more hikes, traditional bonds are becoming a little bit more attractive now, I’m not saying load up in that, but they’re becoming a little bit more attractive now to hold onto than they were certainly over a year ago.

Erin Kennedy (04:20):

And is there anything else that clients need to keep in mind when it comes to diversification? Because a lot of us do just rely on the long-term bedrock of the 60/40 portfolio, stocks and bonds, but the world of investment opportunities is so much greater now.

Wes White (04:35):

And it’s changing rapidly, right? Thanks to innovation in financial technology, I think that there are some really cool things that are happening for investors right now. And at the end of the day, you have so many things that you need to be able to go through and understand as an investor if you’re going to do it all by yourself. But if you’re not, just be sure that you’re working with an advisor who’s independent and that you do trust and someone that has access to all of these tools, not just one kind of model portfolio, set it and forget it. It should be very dynamic because the situation changes.

Erin Kennedy (05:07):

Absolutely. This past year and decade has proved that. Wes, thank you so much for your time.

Wes White (05:11):

Thanks Erin.