The magic asset allocation number so often touted is
a 60/40 split between stocks and bonds. This is
supposed to give you the growth potential of equities
and the stability of fixed-income. Trouble is, that mix
didn’t do so well over the past 10+ years.
Most likely the reason is that almost all equity classes
benefited from a spectacular 10-year bull market run
prior to COVID and then an amazing bounce-back
after the COVID-induced market swoon. Layer on
historically low interest rates for fixed-income
securities and you can see the challenge.
None of this is to say that a stock-bond mix is a bad
idea. It’s simply not a panacea.
"Pie Investing" 101
Today, it is easier than ever to own a broadly
diversified1 stock/bond portfolio, often represented as
a pie. You can buy blended 60/40 portfolios in the
form of a mutual fund. Many have a broad range of
both domestic and international stocks and bonds, for
a rough breakdown of 60% equities and 40% bonds.
Over the past 10+ years, target-date pie funds
became popular in 401(k) plans, where the
stock/bond blend shifts toward bonds progressively as
you age, until you reach a retirement target date.
The latest portfolio pie offerings are from robo advisors who place a slick Internet user interface
between the investor and the fund. The replacement
of a human contact with a website is what warrants
the word “robo.” For some investors, this gimmick
creates a sensation of customized, technologically
advanced wealth management. The number of
investment pie offerings today nearly equals the
number of pizza pie offerings in New York City.
But the investment pie approach is not particularly
effective in avoiding major downside volatility, to say
the least. It can also place a major drag on long-term
Simple and disciplined
What about asset allocations other than 60/40? Well,
there’s no elixir here, either. Sure there are lots of
investment products that let you try different levels of
risk: for conservative (30% stock), moderate (40%)
and aggressive (70%) strategies, respectively. These
investments have been around for a long time, but
take a good look at their performance and risk
characteristics before you invest.
While pie investing can deliver decent returns, it does
have the benefits of being simple, disciplined and
non-emotion-based. But if you’re not careful, the
average-pie-investor can perform substantially less
than the disciplined-pie-investor.
Why? Because too many of these investors made
emotion-driven decisions at bad times. They bail out
when the stock market tanks and get in after it
rebounds. And re-entry can be expensive. Fear and
greed often appear to dominate the investment
allocation process, alas.
The truth is that no asset allocation, regardless of its
breakdown, can cure the ill effects of unwise
stampeding in and out of markets.
Talk to your financial advisor.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
Diversification does not ensure against loss.
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