Is a 60/40 Investment Allocation for Everyone?


One of the most important choices we have with our investments is the allocation of our dollars. How much will we invest in stocks, in bonds, or in any other assets? Large or small, growth or value?  Studies have shown that over 90% of the returns on our investments are driven by this very basic decision.  It should not be taken lightly, and many questions should be asked to help determine which allocation makes the most sense for our situation and risk tolerance.

As we read about this topic, we often find that 60% stocks/40% bonds has become almost a classic for a balanced portfolio. Do we really believe this to be the right allocation, or are we just  unwittingly using 60/40 more often than not?  Most importantly, it should reflect our unique needs and goals.

There are times when an investor will likely want to invest more or less aggressively. For example, a 100% stock portfolio may be great when you are 35, with a very long runway until retirement to absorb market fluctuations. It’s not always so wise when you need to tap your investments for living expenses in retirement.

The best retirement plans consider the answers to a host of differing questions:

  • Do you have health concerns?
  • Do you plan to retire completely or gradually reduce your work life?
  • How do you plan to use your time? Travel? Hobbies? For how long?
  • Are you depended upon for the needs of other family members? Caretaking responsibilities, or financial needs?
  • Do you know how much it will cost to maintain your desired standard of living? Will you really cut your costs, or will the costs of your post-retirement simply replace your current spending?
  • What is your best strategy for claiming Social Security benefits?

Your answers to these questions, as well as many others, should create a plan reflective of you and your needs.

Why is the 60/40 allocation so common? It’s a good balance when you need it.

The 60% often reflects the need for continued investment growth historically obtained from stocks. With life expectancy increasing, many people are planning a 30+ year retirement. In contrast, bonds traditionally provide relative stability and fixed income. In our current low interest rate environment, though,  the income aspect may become harder to achieve. As we age in retirement, the stocks/bonds ratio may move to 50/50 then to 40/60 and so on. It should be a process customized to your situation.

In the years leading up to your retirement, you should carefully consider your very personal answers to the questions above and plan accordingly. And don’t be surprised if it leads to a  60% stocks/40% bonds allocation along the way!

For disclosures, please click here.