Investor Alert

New York Markets Close in:

Rob Isbitts

Nov. 30, 2016, 11:21 a.m. EST

What the retirement gurus didn’t tell you about that ‘balanced’ portfolio

Popular investment strategy has some dangerous issues for retirees

By Rob Isbitts

Getty Images

You work and work and work and finally reach the point where you can live off your investments, and perhaps Social Security payments, a pension, or even some inheritance. But that portfolio of stocks, bonds and funds is your retirement rock. You read about the greatness of "balanced" or "60/40" portfolios, which describes the percentage split between stocks and bonds, and you feel confident that you will live the way you want in your retirement.

But there is something hidden in the history of 60/40 — represented in this column as a combination of the S&P 500 Index (S&P:SPX)  and the Barclays Aggregate U.S. Corporate Bond Index (PSE:AGG)   — portfolios that you might not realize, unless you speak to someone who was where you are now financially in 1999 or 2007. As it turns out, the 60/40 portfolio is not the slam-dunk that some financial advisors would have you believe. My guess is that they have not seen the chart below either.

My firm examined the performance of such a mix over every three-year time period (using monthly return data) from the year 2000 until the end of last year. That's 157 different time periods of 36 months each. As it turns out, the balanced portfolio was not the "slam dunk" many retirees think it is. It only produced a positive three-year return 78% of the time. That may sound OK, and it is ... unless you are part of the 22% and were expecting to make money, not lose it, during your first three years in retirement.

Perhaps more concerning is that the balanced portfolio achieved a 4% return only 66% of the time. In the 1970s, rocker Meat Loaf said "two out of three ain't bad," but he was talking about liking someone, but not loving them. This is your retirement we're talking about, and two out of three is a problem.

But wait, there's more. Remember that during this time, the bond side of the balanced portfolio (40% of its total) has experienced performance Nirvana (yes, another rock ‘n’ roll reference). Interest rates have been generally falling. During the next 15 years, it is more likely that bonds will be a moderate to severe drag on balanced-portfolio returns, as rising rates create negative returns that the low rate of bond income cannot offset. And the stock market has been cyclical, but generally upward moving as well. So keep in mind that what you see here is in many ways the best of times for balanced investors (did you catch that third rock music reference?).

These statistics back up my belief that investors in retirement or nearing it need to consider strategies beyond the classic stock/bond mix. Personally, I have chosen to bypass the standard balanced portfolio with a combination of stocks with above-average dividends, and investments that aim to hedge major stock-market risk of that stock portfolio. Whatever you do, I strongly encourage you to not sit still and settle for the typical Wall Street answer for moderate risk investors. This is a time for thinking beyond what has worked this century. Because the times, they are a' changing. (I know. I know.)

What's your risk number? My firm has made available to Marketwatch.com readers the Riskalyze risk tolerance quiz. It takes about two minutes to complete, and by doing so you can estimate your "investment comfort zone" for short-term market volatility. You can go here to take the quiz.

This material was compiled by Sungarden® Investment Research. Sungarden Investment Research provides advisory services through Dynamic Wealth Advisors. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. SungardenInvestment.com does not provide personal investment advice.

Link to MarketWatch's Slice.