Playbooks / Portfolio
Sixty forty, and its critics
The rule
Sixty percent in equities, forty percent in bonds, rebalanced on a rule. It is the most written-about portfolio in existence and the one most frequently declared dead, usually within a year of it having a bad run.
The declaration is worth examining, because the argument is almost never about the portfolio. It is about the last three years, conducted as though it were about the next thirty.
What the forty is for
Most of the confusion dissolves here.
The forty is not there to produce return. If it were, holding it would be indefensible whenever its yield is low, which is exactly the argument its critics make. It has three other jobs.
It usually falls less than equities, so the whole portfolio falls less. It can be sold to buy equities when equities are cheap, which is the mechanism that makes rebalancing bands work rather than merely tidy. And for anyone drawing on the portfolio, it funds spending without forcing a sale of equities at a low, which is the entire subject of sequence of returns and the reason a retiree and an accumulator should not hold the same mix.
Judged on yield, the forty often looks poor. Judged on the three jobs it actually has, it is doing something no amount of extra equity can do. What bonds are for is the longer version of this argument.
The critique, taken seriously
It deserves better than a dismissal, because parts of it are correct.
Bonds and equities can fall together, and have. The comfortable assumption that one reliably cushions the other is a description of some periods and not a law, which is the general warning in what diversification does.
A low starting yield does cap what the bond side can contribute. That is arithmetic, not opinion: the yield you buy at is the best single predictor of what a bond holding returns.
And two assets is not many. A portfolio of equities and bonds has no exposure to property, to real assets, or to anything that behaves differently from both, which is the case all weather makes at length.
The reply, also taken seriously
A starting yield is a fact about today. It changes, and a portfolio held for decades will buy at many different yields, so a judgement formed at one of them is a judgement about a moment.
A bad stretch is evidence about a stretch. Every mix has them. The test of an allocation is not whether it had a bad three years but whether it was the right allocation for what the money was for, and that question is answered by dates rather than by recent returns.
The number that actually decides the outcome
Here is the part worth taking away.
For most people, the argument about sixty forty is a distraction from a much more consequential split: the one between money that has a date attached and money that does not. Money needed within a couple of years belongs in something that will still be worth the same on the day it is needed, which is cash and short bonds and not a debate about equity weights. Money with no date can take far more volatility than most people give it. Asset allocation by horizon is that framework, and it produces better answers than any ratio.
Sixty and forty are a convention. They were never a result.
The version of this that catches Gulf readers
One specific failure worth naming. Somebody with an apartment, a job in one industry, a salary in one currency and a brokerage account holding sixty forty does not have a sixty forty portfolio. They have a large, levered, undiversified position with a small balanced account attached to it.
The mix that matters is the one across everything owned, including the positions that were never experienced as decisions. That is concentration limits and position sizing, and running them honestly changes the picture more than any adjustment to the equity weight ever will.
And rebalance it
Left alone, a sixty forty portfolio does not stay sixty forty. Every rising market pushes the equity share up, so the portfolio becomes most aggressive precisely when equities have already run, and most defensive after they have fallen. That is the opposite of what anyone would choose deliberately.
The mix is a rule, not a starting point. A rule that is never applied is a label.
The arithmetic
Where it breaks
- Judging it on the last three years. Any two-asset mix will have periods where it disappoints, and the horizon over which the argument is settled is far longer than the horizon over which the argument is conducted. Almost every declaration that this portfolio is dead has arrived immediately after a bad stretch for it.
- Expecting the forty to produce return. It is there to fall less, to be sellable when equities are cheap, and to fund spending without forcing a sale at a low. Judging it on yield alone is judging a component against a job it was never given.
- Treating the numbers as sacred. Sixty and forty are a convention, not a result. The right split follows from what the money is for and when it will be spent, and for many people the honest answer is not close to either number.
- Holding it while owning a large undiversified position elsewhere. Somebody with most of their net worth in one property, one employer or one currency does not have a sixty forty portfolio, whatever the brokerage account says, and the mix that matters is the one across everything they own.
- Never rebalancing it. Left alone, the equity share drifts upward through every rising market, so the portfolio becomes most aggressive exactly when it has already run. The mix is a rule and not a starting point, and a rule that is never applied is a label.
When to use it
When somebody declares the mix dead, and once a year on your own allocation. The useful version of the question is not sixty forty or not, but what each part is for and whether it can still do that job.
Sources
- Bogleheads wiki
- Morningstar, Mind the Gap
- FRED, 10-year Treasury constant maturity (DGS10)
- Aswath Damodaran, valuation data and teaching materials
Last reviewed . Educational research, not personal advice. Disclosure standards.