“ “The summer of 2020 was the point when the classic ‘set it and forget it’ stock-and-bond portfolio was as good as it got.” ”
Rising interest and inflation rates, geopolitical tensions and years in a pandemic have made for a stressful investing experience, and it’s placed pressure on the traditional 60/40 strategy so many retirement savers use.
The 60/40 strategy splits an investment portfolio, where 60% is invested in stocks, and the remaining 40% goes to bonds. Typically, an investor may rely on that asset allocation, and then leave his or her investments alone — the “set it and forget it” approach. That strategy has been contested before, most recently in a Wall Street Journal article.
“For four decades, patient savers able to grit their teeth through bubbles, crashes and geopolitical upheaval won the money game,” wrote Spencer Jakab, editor of the Heard on the Street column and the author of the piece. “But the formula of building a nest egg by rebalancing a standard mix of stocks and bonds isn’t going to work nearly as well as it has.” The “set it and forget it” approach made some retirement savers rich for decades, but it won’t anymore, he wrote.
Not everyone agrees with this argument, however. “There have been many times in history when the 60/40 portfolio has had five- and 10-year returns that are a lot worse than what we’re seeing now,” said Mark Hulbert, a columnist at MarketWatch.
Critics often say the strategy is “dead” toward the tail-end of its poor performance, never at its peak, Hulbert said.
With long-term Treasurys hitting a 16-year peak and expensive stocks, investors have to put more “work” into investing, Jakab argued. The last time the “set it and forget it” approach with a 60/40 portfolio worked best was the summer of 2020, Jakab wrote, and with rising rates and a hefty amount of federal debt, the strategy could continue to struggle.
“ “The next decade might not be pretty, but with work it can be less ugly.” ”
Like with all things stock-market related, there are highs and lows. “Declaring that asset allocation, whether 60/40 or some other combination, no longer works assumes that even over long-time horizons, the fundamental relationships between investments and the economy are broken,” said David Shotwell, a certified financial planner at Shotwell Rutter Baer Financial Planners.
Still, there should be some work put into a retirement plan’s asset allocation. For example, people should occasionally check in and adjust their investments, even if they tend to prefer a more passive investing approach. This could be simply to rebalance the portfolio since asset allocations could change over time because of market events. Personal financial circumstances will also determine if the 60/40 strategy works, said Larry Luxenberg, a certified financial planner and principal at Lexington Avenue Capital Management. “Everyone is different and the 401(k) allocation depends on the rest of one’s financial picture and that changes over time,” he said. Changing your investments based on the news is not an appropriate response, he added.
Diversification can also expand to include other asset classes, such as real estate, commodities, private equity and alternative lending, investment options that are becoming more available to everyday investors through exchange-traded funds and mutual funds, said Laura Mattia, a certified financial planner and chief executive officer of Atlas Fiduciary Financial. There are also ways to diversify within stocks and bonds, such as international choices. “Diversification spreads risk across numerous asset classes and geographic regions, reducing the impact of any single market downturn on your overall portfolio,” she said.
Many retirement savers use a target-date fund, which is linked to a retirement year such as 2050 or 2055. The portfolio automatically shifts asset allocations from risky to conservative the closer it gets to that “target” year. Even this strategy could be too basic for some investors’ retirement needs, so it’s still important to consult with a financial professional or run the numbers thoroughly to ensure it meets goals.
The 60/40 strategy and a “set it and forget it” approach are not mutually exclusive in this environment, advisers said. The most important work to do is to ensure that whatever strategy you choose fits your long-term goals, advisers said.
“The part of ‘set it and forget it’ that is important to remember right now is to ensure that the reasons you ‘set’ your portfolio to its current allocation still apply,” said Eric Scruggs, a certified financial planner and founder of Hark Financial Planning. “Just keep in mind why you are investing the money to begin with. Try to ensure that you are making changes that line up with the ‘why’ for your money rather than reacting to short-term performance.”