Forget the 60/40 Investment Model
Here Are Better Approaches to Diversification
For years it’s been conventional wisdom that a retirement portfolio allocated 60 percent to stocks and 40 percent to bonds was the optimal way to reach one’s financial goals for retirement. That well-trod path worked effectively to build retirement income until the early 2000s, when interest rates started diving and the stock market leveled off for a while.
Today, that same retirement recipe needs more ingredients to ensure a healthy portfolio. Adopting a broader menu of options, including alternative investments, can protect retirement savers from low interest rates and increasingly common market swings caused by economic and political uncertainty. These new allocation ideas are also aimed at contributing significant, stable income across a long life after your career ends and inflation takes hold.
Income, growth, inflation protection and downside market cushion are all crucial parts of a successful retirement investment strategy now, and stocks and bonds alone can’t be relied upon to deliver all those important aspects. We’ve enjoyed a long run of bullish U.S. stock prices, but if the market abruptly turns the other way and bond yields remain at all-time lows, a conventional 60/40 investor is very vulnerable to the widening negative correlation between stock and bond prices.
The outmoded 60/40 model emphasized simplicity, a mindset sometimes referred to as “set it and forget it.” But the lack of diversification it imposed often limited growth potential. In addition, stock valuations today are presenting fewer attractive entry points as markets continue their uptrend, so dependence on equities to build wealth is less of a sure bet. For people who embrace alternative investments as part of their portfolio, varied holdings and asset classes can hedge and complement stock and bond returns, and more closely track their needs as they age.
Piece of the Pie
One way to envision the benefits of portfolio diversification using expanded options is to imagine your favorite pizza. Many of our clients are New Yorkers, who take their slices seriously, so it may be impossible to fully agree on the perfect pie, but if we think of the building blocks of a traditional retirement account—stocks and bonds—as being the sauce and cheese, that’s a good start. Adding in smaller portions of several varieties of toppings, from mushrooms to sausage to broccoli to a few anchovies, contributes flavor, complexity and more food groups to balance out our steaming slice. From time to time, we’d also want to replace some of our favorite ingredients with some new toppings to create a well-rounded pizzeria meal.
Although our perfect pizza is an uncomplicated analogy, choosing the right retirement investments does have similarities. For example, at Altfest Personal Wealth Management we sometimes layer hedged equity, infrastructure plays, derivatives contracts, real estate investment trusts (REITs) and Treasury inflation-protected securities (TIPS) on top of a portfolio’s foundation of stocks and bonds. These are just a few of the types of alternative assets we invest in for you. They are chosen because we expect to see enticing financial opportunities emerge from them over time.
Sometimes the investment is indirect, as in the case of REITs, which own, operate or finance income-producing real estate. Other times, we hunt for themes we think will strengthen your allocation: Among the forward-looking digital infrastructure plays we favor are investments that profit from the buildout of the global 5G network and the smart grid to accommodate autonomous vehicles. Other alternative investments we consider may include commodities, private equity or hedge funds. Finding specialized instruments that allow us to invest in the future is one method of diversifying your retirement portfolio for the potential for better returns.
In lieu of only buying U.S. government and corporate bonds for the traditional 40-percent fixed income portion of a client’s retirement allocation, securities such as master limited partnerships and emerging market debt instruments might shoulder some of the portfolio’s job of providing stability.
Despite our enthusiasm for moving beyond 60/40 retirement portfolios, at Altfest we have long favored managing risk in a different way that we believe is better. We place as much emphasis on risk as on return. Our investment department carefully examines your risk tolerance on an asset-by-asset basis, then looks at it from an overall account point of view. We adjust your investments for risk and rewards beyond just those inherent in stocks and bonds, and those steps can bring about a measurable decline in overall portfolio risk without automatically reducing your returns. In some cases, our decisions about your allocation can even raise returns. We measure our returns on a risk-adjusted basis widely called the alpha correction.
From its start, our firm has taken a value-oriented view, strived to reduce risk and used independent ideas to seek portfolio growth. In this spirit, we refuse to be constrained in today’s investment environment by an old-school portfolio focus solely on stocks and bonds.
While making investment decisions at Altfest, we pay close attention to risks that are currently unappreciated by the market participants and dynamically make adjustments with the objective of generating higher risk adjusted returns. Your Altfest wealth management team can explain more about alternative investments for your retirement account that are right for your financial objectives and risk tolerance.
Andrew Altfest, CFP®, MBA, is an active member of the firm’s Investment Committee and the Portfolio Action Group, which sets investment strategy for client portfolios. Additionally, Andrew leads the firm’s efforts in the tax management of investment portfolios, and advises clients on charitable contributions.
The foregoing content reflects the opinions of Altfest Personal Wealth Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Past performance is not a guarantee of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
Altfest does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.