Why we should rethink the 60/40 portfolio

The 60/40 portfolio split is too generic to accommodate a number of factors, including the fact not everybody has the same risk profile or is the same age away from retirement.  

Speaking at a CFA Societies Australia webinar, Sebastian Page, T.Rowe Price’s head of global multi asset, spoke about his recently released book ‘Beyond Diversification – what every investor needs to know about asset allocation’. 

“Given low expected returns going forward and given where rates are increasing longevity risk. The answer to the question ‘how much stocks should I own – should it be 60/40?’ is probably more than you think,” he said. 

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“If you look at our retirement target date strategies, someone who's 15 years from retirement… we think should hold about 85% of their portfolio in stocks. 

“At retirement, the equity weight is still about 55%, which may seem high, but at 55 [years old], you're 10 years away from retirement. When you reach 65, you can expect to live for another 20 plus years.” 

Page said the reason why the 60/40 advice was generic advice was because risk was not stable through time. 

“On a rolling one-year basis, a 60/40 portfolio can deliver as much as 20% volatility, monthly returns, or as little as 5% depending on the market environment,” Page said. 

“That’s the same asset mix… so it can look very aggressive when markets are volatile, or it can look very conservative in quiet times. 

“Then you need to take into account the fact that capital markets have changed, interest rates are near an all time low, especially real interest rates, so this means if you want to maintain your expected return you need to take more risk.” 

He said the financial industry was evolving to dynamically target risk rather than targeting allocation like the 60/40 split. 

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I think the statement is a little conservative, more than 10 years a COUPLE in their 60's had 1/2 to 1/3 chance of reaching their mid 90's. Therefore portfolio construction for someone at 65yo should be looking to at least 30 years not 20. Secondly I want my client portfolios to last beyond life expectancy. I want my clients to run out of life before they run out of money as the other way round is scary.

I totally agree with the premise of the article, it's just a little US focused, we have traditionally been more 70/30 in Australia and I think most advisers have at least considered, if not acted, on reviewing AA allocations. Given valuations at the moment the challenges do appear to be far greater than the past with increased volatility and drawdown risk with growth assets and much lower expected returns with conservative assets that they too now have vol and drawdown risk.

It's hard enough for the professionals to navigate this landscape, I do wonder how the unadvised will navigate the next 10-15 years successfully.

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