The 60-40 Strategy – Pathway to Portfolio Ruin

A recent Wall Street Journal article titled “The Trusted 60-40 Investing Strategy Just Had Its Worst Year in Generations” shows the perils of this strategy in a harsh spotlight .

1. A reliance on bonds for fixed income is outdated advice that does not produce good outcomes. This is tired old thinking and gives unpredictable, sometimes disastrous, results
2. The timing of returns, and when bad years fall, can have a dramatic effect on the longevity of your portfolio.
3. Higher Interest Rates are here to stay, which may signal a higher correlation between stock and bond prices, negating the value of the traditional 60/40 stock/bond strategy.

The tried-and-true 60-40 portfolio lost 17% last year, its worst performance since at least 1937, according to Leuthold Group analysis. Even with a 14% gain in the S&P 500 helping the strategy recover in 2023, stocks and bonds have moved in tandem, more over the past three years than any time since 1997.

and here’s another nugget:

…while stocks and bonds have moved in opposite directions for much of the past 23 years, the three decades prior—when higher interest rates were the norm—saw them often moving in tandem.

So what is a smart investor to do? Well, I’m sure you’ve heard the maxim to “Buy term and invest the rest” in life insurance discussions… and I have a similar smart play with fixed income.

Instead of a bond allocation, consider our fixed income payments as the income-producing foundation of your portfolio. It’ll produce income, at a great yield (6%+ in today’s market!) and be there, month in and month out. The longer the income stream the better…. Use guaranteed income to cover guaranteed living expenses

Then, invest the remainder of your portfolio oriented more to growth. This is discretionary money, inheritance planning, safety net. Yes, it’ll fluctuate and be volatile, but if you’re not relying on this ‘bucket’ of money for groceries and day to day expenses, you mitigate the risks and won’t be forced to sell when the values are down.

In a nutshell, this is the core of our “Wholesale Income” strategy using high yield DCF Income Payments. And it just plain works.