Is 60/40 Dead?


I have noticed that several financial gurus have recently reported that old stock and bond allocation rules for your portfolio are outdated. The adage that you should invest 60% of your money in stocks and 40% in bonds has been around for many decades, and perhaps now is the time to revise the numbers.

Current wisdom dictates if you are in your 20s, you should invest 100% of your funds in stocks, you ought to bring your stock ownership down to 70% to 80% by the time you reach your 60s, and finally reduce your exposure to common stocks to 40% to 60% after age 70.

Benjamin Graham, many decades ago, advocated investing no more than 75% and no less than 25% in stocks with the balance in bonds. Mr. Graham left it up to you to decide allocation percentages that best fit your risk requirements, stock and bond market perils, and your age.

I agree with Ben Graham’s allocation advice, with the exception of the bond portion of your portfolio, which I think should not be made up entirely of bonds, especially with bond yields as low as they are now. The bond portion of your portfolio should include a mix of cash, bonds and conservative, dividend-paying stocks. In addition, the stock/bond percentage mix should be governed by the overvalue/undervalue status of the current stock and bond markets.

Currently, I recommend that you invest 35% to 40% of your money in low- to moderate-risk stocks and the balance in cash, bonds (preferably defined maturity bond ETFs) and conservative, dividend-paying stocks because the stock market is at least somewhat overvalued. Aggressive investors with short-term objectives could, I suppose, apply the approach outlined in paragraph two above. But if you are investing a high percentage (or all) of your portfolio in stocks, at least part of your holdings should include conservative stocks.

Each month in the Cabot Value issue, I provide my advice on how you should apportion your portfolio. You certainly don’t have to follow my allocation precisely, but hopefully my conservative allocation will provide you with worthwhile input.

This is an excerpt from Cabot Benjamin Graham Value Investor, which features the very best undervalued stocks to buy right now. Chief Analyst J. Royden Ward tells you exactly which undervalued stocks to buy and when to take profits. This advisory is ideal for conservative investors.

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