Is the 60/40 rule dead? Before we begin this discussion, what exactly is the 60/40 rule for bonds and stock market investing? Simply put, an investor with a moderate risk tolerance and a long-term time frame (an investment outlook of at least 5 to 7 years) should have 60 percent of their investment portfolio in the stock market and the remaining 40 percent in bonds. Sub-divided further, the 60% allocated to stocks is spread out amongst US large cap, mid cap and small cap stocks, developed international stocks (Japan and Western Europe) and emerging markets (such as Brazil, Russia, India and China). Breaking the 40% bond weighting down further is more difficult. Most money managers would include such sectors such as US treasuries, US corporate, US high yield, TIPS (Treasury Inflation Protected Securities) and foreign bonds in their bond allocations.
Why would the 60/40 rule be dead? The answer lies in how long we are living today and what our age lifespans will be going forward. With people living longer and healthier lives than ever before, it is almost that our lifespans will exceed the mid-70’s time frames of recent generations. Therefore, author Anna Robaton from CNBC.com (and many financial advisors in general) argues that investors need to allocate a higher proportion of their investments to stock market exposure in order to keep fueling the growth portion of their portfolios for a longer time period. Many advisors call for bumping up stock market investing to the 65% or even 70% level.
Why bump up your stock market investing percentage?
The higher level of equity investments over the longer-term is simple: Stocks outperform bonds over longer periods. Furthermore, with practically every fixed-income analyst calling for the end to the 40-year bull market in bonds at some point in the very near future (many were calling the end 5 years ago and still are), bonds can be viewed as being a near-term risky asset. With the 10-year Treasury paying right around 2% and the Federal Reserve at one point late last year calling for 4 interest rate hikes going into 2016, the near-term outlook for most things fixed-income may not be rosy. No one is calling for a collapse in bonds, but bond prices move inversely to interest rates through the concepts of duration and convexity. Many advisors even suggest increasing exposure to dividend paying stocks and preferred shares to gain income exposure which traditionally has been set aside for bonds.
Complicating the matter further are the abundance of non-traditional or alternative investment choices available to investors that are being used to take up a small portion of the slack from the fixed-income sector. Real estate investment trusts (REITS), commodity funds, hedge funds and managed futures are some of the products that have gained in popularity over the past 10 years that can add diversification and return. Many advisors suggest holding in the area of 5% to 10% in alternative investments.
To view the entire article about bonds and stock market investing by Anna Robaton from CNBC.com, please go to Is It Time to Ditch The 60/40 Rule?
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