For many years, the 60/40 portfolio strategy-60% stocks for growth, 40% bonds for safety-was perceived as the golden rule of investing. However, recent studies, including one from the National Bureau of Economic Research (NBER), suggest this strategy may actually be limiting to individual wealth. According to this study, a strict adherence to the 60/40 rule might reduce a person's lifetime spending capability by almost 4% as opposed to using a more tailored investment approach.
This conclusion is supported by industry experts, including analysts from BlackRock, Inc., a prominent fund management company. They contend that the shifting landscape of fiscal, trade, and policy dynamics is challenging the stability, performance, and diversification potential of 60/40 portfolios.
A significant drawback of the 60/40 strategy is that it doesn't consider individuals' unique circumstances, such as age, income, savings habits, and job stability. For example, young, high-earning individuals with consistent incomes and good savings habits can afford to take on more risk, while retirees commonly require a lower risk profile. Additionally, a 40% allocation to bonds can negatively impact purchasing power, particularly during periods of high inflation.
The NBER research team proposes moving away from universal investment formulas like 60/40. Instead, they recommend individualized calculations based on personal data, including age, income, risk tolerance, and savings rate, to create a portfolio that better suits individual circumstances.
The relevance of this personalized approach was demonstrated in the team's testing of thousands of scenarios; their method was found to be almost as accurate as a 'perfect' investment plan calculated by supercomputers, and consistently outperformed traditional rules of thumb. The study found that a personalized portfolio approach, which considers one's income, career trajectory, and savings habits as integral parts of the overall wealth picture, outperformed an all-stocks investment strategy by approximately 12%.
In conclusion, the research suggests that the 60/40 investment strategy is no longer the most effective method of building wealth. A personalized portfolio approach that takes account of specific personal details can help maintain financial stability better than the outdated one-size-fits-all advice.