Set and Forget

Financial Life Planning for Busy Parents

The 60/40 401k Portfolio is Dead! 😯

Are you one of the many who set up a 60/40 stock-bond split in your retirement portfolio, thinking it was the golden ticket to a worry-free retirement? Well, think again. Recent market events have signaled a paradigm shift, leaving the classic 60/40 401k portfolio gasping for breath.

The Rise and Fall of the Classic Portfolio

According to the Wall Street Journal (paywall), the classic 60/40 stock-bond split, comprising the S&P 500 index and 10-year Treasury notes, earned a respectable 15.3% in 2020. For decades, this strategy rode on 40 years of tailwinds from falling bond prices, offering investors a relatively smooth journey toward their retirement goals.

However, the landscape drastically changed in 2022. For the first time in over 50 years, both stocks and bonds experienced a downturn. The culprit? Inflation! It turns out that the real killer isn't market crashes; it's the relentless rise in inflation that's wreaking havoc on traditional portfolios.

Inflation has emerged as the silent enemy, eroding the purchasing power of your hard-earned savings. The 60/40 portfolio, once considered a stalwart, is now facing a wide range of outcomes. What worked for the past four decades may not necessarily be the silver bullet for the future.

How can you learn from the past and protect your future?

1. Don’t rely on market timing metrics: The attempt to time the market using metrics like CAPE10 or any other value-based indicator has proven futile. Studies show that trying to tilt your portfolio based on specific market values above or below a certain line is no more effective than blind luck.
2. Rebalance: In times of uncertainty, it's essential to be adaptive. Instead of sticking rigidly to a pre-determined allocation, consider rebalancing your portfolio based on market conditions. Take what the market gives you and adjust your holdings accordingly.
3. Build a War Chest: In the face of economic uncertainty, it's wise to hold a financial "war chest." This means having seven to ten years of spending set aside. This cushion can provide peace of mind, ensuring you have the financial flexibility to weather storms without compromising your long-term goals.
4. Explore alternative investments: The Wall Street Journal suggests looking beyond the traditional. Small-capitalization, emerging-market, and value stocks offer the benefit of diversification at seemingly more affordable prices. This diversification can act as a safeguard against the challenges posed by a volatile market.

The classic 60/40 401k portfolio may be on life support, but all is not lost. By adopting a flexible approach, avoiding market timing traps, and exploring alternative investments, you can navigate the turbulent waters of today's economic landscape. The key is to be proactive, stay informed, and be willing to adapt your strategy to ensure a secure and prosperous retirement. Remember, the only constant in the financial world is change, and it pays to be prepared.