Get Your Retirement Stocks Bonds Mix Right

Is the traditional 60/40 split between stocks and bonds — what financial planners call an “asset allocation model” — dead on arrival for retirement investors? In one sense, yes. But let’s not be hasty. The retirement stocks bonds mix can work.

The problem isn’t just low current bond yields, although that is a big problem. Nor is it stock market volatility, although short-term ups and downs seem to define the indexes these days.

No, the criticism of the 60/40 retirement stocks bonds mix is that it no longer applies at all, that it’s too simple an approach.

Let’s attack that second problem first.

Too simple? Probably. But put yourself in the shoes of a typical financial adviser. Two clients come in to see you each week on Friday — one in the morning, one in the afternoon.

The early client is a bond believer. You might be able to get him to move ever so slightly up the risk curve toward higher yield, but not by much. Stocks? What, are you crazy? No way he’s buying stocks. It’s bonds or cash all the way.

Your afternoon appointment is a wild-eyed trader. She wants equities stacked on equities, always angling for a hot tip to stick in the portfolio. Even blue-chip dividend plays bore her to tears. Investing for her is all about making a killing on appreciation.

You know that the bond buyer needs a hedge against inflation. The stock buyer would benefit from the stabilizing influence of a steadier return. What do you tell these very different people about their retirement stocks bonds mix that they might actually hear and accept?

So you, the financial adviser, have a sales job to do: You need to get these folks somewhat diversified without scaring them away as clients. Voila, the 60/40 model is the answer.

You tell the bond person not to worry, he will be mostly in bonds later on, and you point out that dividend stocks are like bonds in some ways — they offer income and relative safety. And you tell the stock jockey that bonds help her bank gains over time. Fixed income is like insurance, you explain, helping her avoid unnecessary volatility.

Everyone wins, right? Until now.

The typical argument for both sides of the retirement stocks bonds mix is in question, thanks to those low yields and the recent experience of the 2008-2009 crash. Bonds don’t pay and stocks don’t climb straight up anymore.

So, asset allocation is dead, right?

Nope, it just grew up. Asset allocation works fine, if you expand the model to match the best practices of major endowments and pension funds.

That means you own stocks, but not just the S&P 500 or the Dow. You own a calibrated mixture of U.S. major stocks, small caps, foreign developed country firms and emerging markets equities. You buy value plays but also growth-oriented issues and, of course, solid dividend-payers.

On the bond side, you own Treasuries via whole-market ETFs but also high-yield and foreign government debt. You get growth and income from real estate, too, and a slice of commodities to hedge against inflation.

Your retirement stocks bonds mix

Crucially, you own these investments not as curated “picks” that need to be fawned over by an active manager but through very broad, efficient ETFs and index funds. That brings you low cost and high liquidity, the perfect balance of performance and price.

Importantly, you and your adviser stop trying to “figure out” where the next million-dollar investment idea is coming from. Instead, as the market turns and bucks among asset classes, you actively rebalance your holdings, taking gains where they happen, selling high in order to buy low, over and over.

That means financial advisers have a new sales job to do: Retirement investors need to be re-educated as to why asset allocation works in the first place and why it still works as a retirement stocks bonds mix.

Not because of some magical mix of just two asset classes but of several, and because of a careful, thoughtful effort to use rebalancing to steadily compound savings into long-term wealth.