Harry Markowitz, father of Modern Portfolio Theory, introduced the concept of the standard 60/40 portfolio (60% stocks & 40% bonds) in 1952. Back then this portfolio mix made sense because the retirement age of 65 was one year short of life expectancy. The 60/40 portfolio (constructed with S&P 500 stocks and long Treasury bonds) has gone unquestioned for many years but is now proving injurious to many people who spend as many as 20 to 30 years in retirement.
Life expectancies have lengthened considerably since 1952 due to the introduction of antibiotics and other advances in medicine. However, there has been no adjustment in 60/40 portfolio construction after taking into account longer life spans.
The 60/40 portfolio mix hurt 1952 retirees that lived until 1980. Long-term Treasury bonds provided a yearly return of 2.4% during this period, but inflation advanced to a 4.3% clip which meant that purchasing power declined more than 40% for the bond segment of this portfolio. And the bond return suffered even more if held in a taxable account.
The past ten years have also been unkind to bond investors. An investor starting out with a portfolio of long Treasury bonds in 2015 ended up with a cumulative return of just 3% by 2024 due to rising interest rates while the price level jumped 36% based on the CPI. Investors lost 34% of their money in real terms over this period.
The business community always adjusts to rising inflation through cost cutting and by building inflationary costs into their end prices which allows their stocks to stay ahead of inflation. The past decade, which witnessed rising inflation, is one good example. The S&P 500 produced a 242% return over 10 years ending 2024, but bonds were held to a 3% gain due to rising inflation.
The typical investor typically starts out investing at an age somewhere in their 30’s. They are advised in literature and through advisors to be risk-averse and are directed to build a portfolio of stocks and bonds. Some investors are pushed to own more bonds than stocks or even just bonds.
The preponderance of literature along with most advisers recommend heavy ownership in bonds when the retirement age of 65 is reached. Many advisors push target age portfolios that are based on the rule of 100 which means that one subtracts their age from 100 to arrive at total bond exposure in their portfolio. According to this logic, bonds would make up 65% of holdings at age 65 and expand to 75% at age 75. Like the 60/40 portfolio, this widely recommended approach is another bad idea. Truth be told, it’s a worse idea.
At this point in this discussion, it should be apparent that this writer is stock centric and for good reason. An article which I wrote titled “The Real Risk is to Not Invest in Stocks” was published in Pension’s & Investments in 1982. I asked the following question that if corporate and municipal retirement plans are entities for perpetuity, why are these plans only invested 50% in stocks when stock returns have historically eclipsed bond returns by a wide margin.
If they had heeded this advice back then and upped stock allocations to 75%, every retirement plan in the country would be fully funded today. Since 1982, investing in an S&P 500 fund would have produced a gain of $5 for every $1 gain produced by long Treasury bonds.
Stocks are often viewed as being risky. While true on a near- term basis, stocks are the biggest winners over time. Most investors do not need all their funds in the next year, but their portfolios are oriented in this way with unduly heavy exposure to fixed income securities.
The evidence is clear; only 7% of all retirees are able to sustain their standard of living in retirement according to the National Institute on Retirement Security. Given this reality, investors would be far better served by abandoning the 60/40 portfolio and ratcheting up the stock portion to at least 80% and even 100%. Target age portfolios with disproportionate weighting in bonds should be abandoned all together.
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Robert Zuccaro, CFA is the Founder & CIO of Golden Eagle Strategies. Over the course of his 40-year investment management career, Robert has managed market leading institutional portfolios and four mutual funds. He is one of the most successful investment managers, having been named a top 10 manager in numerous years by the Wall Street Journal and Lipper Fund Survey. He’s also been cited for outstanding performance by Financial World, Investor’s Business Daily, and Business Week.
Email: [email protected]/ phone: (561) 510-6606
