Why The 60/40 Portfolio Rule Is NOT For Everyone – The Statistics Might Surprise You

Earlier this week I tweeted the following question:

Would you retire with $1M in your bank account?

— Daniel | The Money Maniac (@RealMoneyManiac) August 14, 2023

 

The replies were fairly divided (an ambitious bunch!) but one response stuck out to me in particular...

One person said no because it wouldn't provide enough income in his 100% bond portfolio.

I thought, "Wow, that is playing things extremely safe."

So today, I wanted to explore why I would not recommend that allocation for most investors.

What is the right mix of stocks and bonds in your portfolio?

Instead of telling you my opinion, I'd rather help you decide for yourself...

Let's dive into the numbers and review 6 potential options!

1) 100% Bonds / 0% Stocks

Key Stats:

• Average annual return: 6.3%
• Time to double: 11.3 years
• Best year (1982): 45.5%
• Worst year (1969): -8.1%
• Years with a loss: 20 of 96

This allocation makes sense in two scenarios: if your investment horizon is very short or if you are very risk-averse.

You see, even this "safe" allocation does expose you to some volatility — though you could avoid this by investing in CDs.

But during this same timeframe (1926 - 2021), the inflation rate was ~2.9% which would have eaten away at nearly half your returns.

2) 80% Bonds / 20% Stocks

Key Stats:

• Average annual return: 7.5%
• Time to double: 9.6 years
• Best year (1982): 40.7%
• Worst year (1931): –10.1%
• Years with a loss: 16 of 96

This is still a very defensive and income-focused portfolio. It prioritizes stability and successfully minimizes the number of years with a loss.

But it also opens the door to some growth, as we can see with the nearly 1% better returns. (And a much faster doubling time!)

You may choose this portfolio if you are interested in wealth preservation, rather than wealth building.

3) 60% Bonds / 40% Stocks

Key Stats:

• Average annual return: 8.7%
• Time to double: 8.3 years
• Best year (1982): 35.9%
• Worst year (1931): –18.4%
• Years with a loss: 19 of 96

This is a more balanced mix of investments. If you are willing to tolerate some risk for higher returns, it's an excellent option.

You may consider this portfolio if you are retired, approaching retirement, or if you have a medium-term time horizon.

4) 40% Bonds / 60% Stocks

Key Stats:

• Average annual return: 9.9%
• Time to double: 7.3 years
• Best year (1933): 36.7%
• Worst year (1931): –26.6%
• Years with a loss: 22 of 96

This is the classic, widely-recommended allocation for your everyday investor. It offers a mix of both income and growth and it's ideal for people who are looking for a stable level of appreciation.

This portfolio avoids the dramatic swings of a more stock-based allocation, while still capturing most of the upside potential.

5) 20% Bonds / 80% Stocks

Key Stats:

• Average annual return: 11.1%
• Time to double: 6.6 years
• Best year (1933): 45.4%
• Worst year (1931): –34.9%
• Years with a loss: 24 of 96

This mix is best suited for aggressive investors. Those with long time horizons and high risk tolerance may choose to capitalize on the compounding effect of these higher expected returns.

Plus, by maintaining some exposure to debt, a younger investor can still benefit from the stability and income of bonds during market downturns.

6) 0% Bonds / 100% Stocks

Key Stats:

• Average annual return: 12.3%
• Time to double: 6.0 years
• Best year (1933): 54.2%
• Worst year (1931): –43.1%
• Years with a loss: 25 of 96

This is a true "balls-to-the-wall" strategy. It maximizes growth potential but opens you up to large swings in your portfolio's value.

It's also important to recognize that riding out the inevitable market pullbacks is easier said than done. So if you are prone to panic selling or losing sleep during bear markets, it's best to dial back the risk from here.

Remember, the "right" allocation model is unique to every investor.

The ideal mix for you will be dictated by your:

• Investment goals
• Risk tolerance
• Time horizon
• And more!

But hopefully, by reviewing these options and their historical performance, you can get a sense of how to structure your own portfolio going forward.