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Does the “60/40 Portfolio” actually work in retirement? Our advisor partners have a LOT to say about this. Here is a compilation of some of the points they have made during our live events and recorded webinars.


  1. Conventional Wisdom/Conventional Portfolio Design

Conventional financial thinking is that stocks and bonds tend to behave in opposite ways; when one goes up the other goes down. This “negative correlation” supposedly offers a “parachute of safety” and easy diversification over time, making a default to a 60/40 portfolio during the accumulation phase of life (60% stocks and 40% bonds) a “prudent” way to invest.


Conventional portfolio design begins to change proportionately after a client reaches age 40. At that time, the “Rule of 100” kicks in, upping the percentage of bonds in the portfolio to match the client’s age. For instance, by age 65, the portfolio ratio should be 35/65 stocks to bonds.


Our advisor partners tell us that even though big brokerage firms claim that they design “custom” portfolios, in reality, most brokerage portfolio design software works like this—it’s just a ratio of stocks to bonds based on age. The fixed portion of the portfolio assets just “gets allocated to a larger global mix of bond funds every year.”


  1. Current Low Interest Rates/Low Bond Returns

In today’s low interest rate environment, does it really make sense to have the majority of a retirement client’s holdings in bonds earning low returns? As Yale-emeritus Roger Ibbotson says, “Investors usually increase their bond holdings to reduce risk in their portfolios, but doing so in the current low-yield environment means risking not having enough income in retirement along with reduced prospects for capital appreciation.”


According to one of our advisors, most bond funds are “averaging around 3-1/2%, and after deducting an average fee of 1%, the majority of a retiree’s portfolio would only be returning 2-1/2% or so” at this point in time. “That doesn’t even keep up with inflation.” He says clients would be “better off in FDIC-insured bank CDs at that rate of return.” As a fiduciary, he was passionate about finding something else for his firm’s clients besides bonds, which is why he came to partner with Quantum.


  1. When Interest Rates Rise, Bonds Go Down

In addition to bonds having overall low earnings right now, Quantum financial advisor partners remind their clients that bonds aren’t guaranteed; “bonds can lose money, that’s just a fact.” When interest rates rise, bonds tend to lose value. No one has a crystal ball to know what’s going to happen in the future, but it just makes sense to hedge against interest rate risk with at least a portion of the retirement portfolio.


One advisor says that the “light starts to turn on” with his clients that are age 75+. “Everyone over that age remembers a timeframe when interest rates were low. Then in 1971, the U.S. went off the gold standard, there were oil shortages, then interest rates started to skyrocket. The Federal Reserve kept raising rates to combat inflation. At one point, the interest rate on mortgages was at 16+%! Most people in retirement want protection from the risk of interest rates going back up—they want safety, protection and guarantees.”


  1. Inverse Relationship of Stocks to Bonds

The foundational principle of financial advice still being used today is that bond values always rise when stocks go down. But that is not exactly true, according to experts. One advisor did the research and found that over the last 150 years, an inverse relationship existed only 30% of the time—in fact, “looking back at the last 12 years since the 2008 recession, stocks and bonds have been virtually in lockstep; they are moving together.”


Just as bull and bear phases in stock markets tend to cycle, so too is the tendency for the equity-bond correlation to cycle as well. Graham Capital Management, for example, constructed a time series of returns of the S&P 500 and the 10-year Treasury note going back to 1871 and found that a five-year average of equity-bond correlation had been negative for 635 months compared to 1,063 months when it was positive. And while the averages of one-year and five-year correlations between equities and bonds are close to zero over the length of that time series, equity-bond correlation cycles through periods of significant positives and negatives, Graham Capital says.


The research further notes that the length and magnitude of the current “negative correlation regime” that started in the 2000s has been unprecedented. So that means it may be time for investors to rethink their asset allocation if they’ve mostly jumped head first into the 60/40 portfolio mindset.


  1. Duration and Credit Risk

In addition to the increased risk that the returns on stocks and bonds may be reentering a phase of positive correlation, bond funds which closely track popular benchmarks like the Barclays U.S. Aggregate may be exposed to more interest rate sensitivity through duration.


At the time of this writing, the Barclays U.S. Aggregate’s average duration is currently at around 6.0, matching its highest level on record and well above its average of about 4.5 from 1989 through 2008. So a bond fund based on that index would see its price fall by roughly 6.0% if the relevant interest rate rose by one percentage point – a much larger drop than such a fund would have experienced in the past, according to research from Charles Schwab & Co.


Credit quality is also declining, Schwab’s research notes. While the Barclay’s U.S. Aggregate has nearly 40% of its holdings in U.S. Treasury securities, bonds with single-A and triple-B ratings make up about 25% of the index, up from 16% a decade ago.


And if investors hold even lower rated, or below investment grade bonds like junk bonds, in their portfolios, their returns may exhibit volatility similar to that of stocks. Under conditions such as bear markets caused by recessions, for example, the correlation of junk bonds to stocks tends to rise toward 1. That’s the wrong time for an investor’s portfolio to experience such a correlation, as recessions tend to pressure highly-leveraged companies’ balance sheets and their ability to issue or refinance debt. The lower the credit quality, the more equity-like the risk.


  1. Fixed Indexed Annuities

Industry scholars and research heavyweights like Roger Ibbotson have run calculations demonstrating that fixed indexed annuities (FIAs) can outperform bonds in the retirement portfolio. “Fixed indexed annuities can offset [bond] shortcomings: In addition to earnings that grow on a tax-deferred basis, they guarantee a set interest rate and provide exposure to stock market returns, which tend to be higher than bond market returns,” according to Ibbotson’s white paper. But the risk of fixed indexed annuities ultimately rests with the insurance company that sells them and guarantees the payments. For that reason, “it’s important to go with a highly rated insurance company and one you trust,” says Ibbotson.


As one of our advisors puts it, “There are bad annuities just like there are bad stocks. The thing about annuities is that you need to understand the underlying architecture of each product. It’s possible to capture 50-60% of market gains while being protected against market losses during downturns; it’s our job to maximize the production of our clients’ dollars while protecting them from risk. You may think you don’t like annuities, but this space has grown and changed drastically even in the last seven years. As a bond replacement or supplement, FIAs just work.”


“You have to understand, I come from a family of stockbrokers, my degree is in economics and finance, and I’ve worked for some of the biggest names in investment banking and stock brokerages. As a fiduciary now, I cannot in the best interest of my retirement clients be charging them a 1% fee to hold the majority of their portfolio in bonds right now; we just wouldn’t be fulfilling our duty.”






The opinions in the preceding commentary are just opinions. Information has been obtained from advisors as well as third-party sources we consider reliable, but we do not guarantee that the facts cited are accurate or complete. This material is not intended to be relied upon as a forecast or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should consult their financial advisor on the strategy best for them and their situation.


Annuities have limitations. They are long-term vehicles designed for retirement purposes. They are not intended to replace emergency funds, to be used as income for day-to-day expenses, or to fund short-term savings goals. Investing involves risk.


A fixed indexed annuity is not a stock market investment and does not directly participate in any stock or equity investment. It may be appropriate for individuals who want guaranteed interest rates and the potential for lifetime income. Guarantees and protections are subject to the claims-paying ability of the issuing insurance company.


Past performance is not a guarantee of future results. The Quantum Group, and its affiliates, have a financial interest in the sale of their products. Insurance products like FIAs contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions such as surrender periods. Guarantees are based on the claims-paying ability of the insurance carrier.