{"id":181304,"date":"2025-02-26T14:17:55","date_gmt":"2025-02-26T21:17:55","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=181304"},"modified":"2025-02-26T14:24:37","modified_gmt":"2025-02-26T21:24:37","slug":"is-the-60-40-portfolio-dead","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/is-the-60-40-portfolio-dead","title":{"rendered":"Traditional Investment Advice is Outdated\u2014Why the 60\/40 Portfolio is Dead"},"content":{"rendered":"\n

In the 1950s, economist Harry Markowitz developed <\/span>the Modern Portfolio Theory<\/span><\/a>, proposing the 60\/40 portfolio as a balance between stocks and bonds. Millions of investors have used it as a default asset allocation ever since.<\/span><\/p>\n\n\n\n

Fast-forward to the 1990s, when financial planner Bill Bengen set out to discover the \u201csafe withdrawal rate\u201d for retirees\u2014what percent of your nest egg you can pull out to live on in retirement. He assumed the average person needed their nest egg to last at least 30 years, so he looked at every 30-year period since 1926 to see which one performed worse. <\/span>The worst 30-year period for a person to be retired started in 1966 <\/span>if you were curious<\/span>.<\/span> <\/span><\/p>\n\n\n\n

He then calculated <\/span>the most<\/span> that someone could have withdrawn in the first year of their retirement without draining their nest egg in under 30 years. He assumed they had half their money in the S&P 500 and half in medium-term government bonds. <\/span><\/p>\n\n\n\n

The answer:<\/strong> 4.15%.<\/span> He rounded that to 4%, and that\u2019s how the <\/span>4% rule<\/span><\/a> was born. <\/span><\/p>\n\n\n\n

Can you handle one more conventional finance rule of thumb? The \u201cRule of 100\u201d asserts that people should subtract their age from 100, and that\u2019s the percentage of their portfolio that should <\/span>be invested<\/span> in stocks (the rest being in bonds). <\/span><\/p>\n\n\n\n

Got it? Great. <\/span><\/p>\n\n\n\n

Now, let\u2019s throw all that out the window. <\/span><\/p>\n\n\n\n

The U-Shaped Asset Allocation<\/span><\/h2>\n\n\n\n

Paula Pant of <\/span>Afford Anything<\/span><\/a> had a great <\/span>interview with Bill Bengen<\/span><\/a> recently, in which he <\/span>himself<\/span> argues that most people will do <\/span>just<\/span> fine with a 5% withdrawal rate.<\/span> <\/span><\/p>\n\n\n\n

First, the 4% rule <\/span>was designed<\/span> for virtually zero risk. <\/span>It\u2019s based<\/span> on the worst-case scenario in modern history. <\/span><\/p>\n\n\n\n

That aside, Bengen notes that you can <\/span>just<\/span> slim down your stock investments around the time you retire, hold conservative assets like bonds and cash for a few years to get over the hump of <\/span>sequence of returns risk<\/span><\/a>, and then put more money back in equities.<\/span> <\/span><\/p>\n\n\n\n

It\u2019s worth pausing for a quick explanation of the sequence of returns risk. It turns out that when downturns hit, it actually matters for retirees. You really, really don\u2019t want a market crash in the first couple years of your retirement since you\u2019ll end up selling off too much of your portfolio too early, and even when the market recovers, your portfolio doesn’t. <\/span><\/p>\n\n\n\n

So, you slash your stock exposure for the first few years of retirement, <\/span>then<\/span> bump it back up and enjoy a 5% withdrawal rate. If you need $40,000 in income from your nest egg in retirement, that\u2019s the difference between a nest egg of $800,000 and $1 million. <\/span><\/p>\n\n\n\n

Study: 100% Equities Outperform 60\/40 Portfolios<\/span><\/h2>\n\n\n\n

That\u2019s all still pretty conventional advice. <\/span><\/p>\n\n\n\n

Emory finance professor Aizhan Anarkulova and her co-authors recently published a paper that found an asset allocation of <\/span>100% stocks outperformed<\/span><\/a> both<\/span> classic 60\/40 portfolios and target date funds (TDFs).<\/span> <\/span><\/p>\n\n\n\n

Now, we\u2019re getting a little further off the beaten track. And we haven\u2019t introduced real estate yet. <\/span><\/p>\n\n\n\n

Anarkulova and her co-authors used geographical diversity as a substitute for stock\/bond diversity. <\/span>They ran their numbers with portfolios of 33% U.S. <\/span>stocks<\/span> and 67% international stocks (<\/span>what<\/span> the authors refer to as the \u201coptimal portfolio\u201d).<\/span> <\/span><\/p>\n\n\n\n

It <\/span>probably<\/span> comes as<\/span> no surprise that portfolios entirely made up of stocks have outperformed 60\/40 stock-bond portfolios on average.<\/span> Stocks have a <\/span>much,<\/span> much higher historical return than bonds, after all.<\/span> Anarkulova\u2019s \u201coptimal portfolio\u201d produced 50% more wealth for retirees than 60\/40 portfolios and 39% more than TDFs. <\/span><\/p>\n\n\n\n

Where it gets interesting is that the \u201coptimal portfolio\u201d actually proved safer than 60\/40 portfolios and TDFs. <\/span>They ran out of money less than half as often<\/span>, according to the study<\/span>.<\/span>  <\/span><\/p>\n\n\n\n

My Asset Allocation<\/span><\/h2>\n\n\n\n

I aim to <\/span>have<\/span> around 50% of my <\/span>investments in<\/span> stocks and the other 50% in real estate.<\/span> I don\u2019t invest in bonds. More on that momentarily. <\/span><\/p>\n\n\n\n

When I say \u201creal estate,\u201d I mean a wide range of <\/span>passive <\/span>real estate<\/span> investments<\/span><\/a>. <\/span>These include debt investments (<\/span>such as<\/span> private notes and debt funds) and equity investments (<\/span>such as<\/span> private partnerships<\/span><\/a>, real estate syndications, and equity funds).<\/span> <\/span><\/p>\n\n\n\n

No landlord headaches, renovations, financing, city inspectors, tenants, property managers, or contractors.<\/span> This<\/span> is how billionaires invest in real estate and <\/span>beat the market<\/span><\/a>. <\/span><\/p>\n\n\n\n

I know what you\u2019re thinking: Most of those investments require a minimum investment of $50,000 or more! Sure\u2014if you invest by yourself. I invest $5,000 at a time, going in on these investments with other members of my Co-Investing Club.\u00a0<\/span><\/p>\n\n\n\n

Investing relatively small amounts lets me diversify across many cities <\/span>and states, many<\/span> asset classes, and <\/span>many<\/span> operators.<\/span> Today, I own a fractional interest in around 3,000 units spread <\/span>all over<\/span> the U.S.<\/span><\/p>\n\n\n\n

It also lets me diversify across time commitments. <\/span>Our Co-Investing Club has made <\/span>investments with<\/span> short-term turnarounds of nine to 12 months, medium-term turnarounds of one to three years, and longer-term investments of four <\/span>years<\/span> or longer.<\/span> That helps spread out the repayments over time, which makes it easier to do \u201c<\/span>lazy 1031 exchanges<\/span><\/a>\u201d to slash my tax bill. <\/span><\/p>\n\n\n\n

Why I Invest in Real Estate Instead of Bonds<\/span><\/h2>\n\n\n\n

Let\u2019s start with the obvious: Bonds deliver pretty shoddy long-term returns. That extends to corporate bonds, too, not just government bonds. <\/span>No, really\u2014<\/span>the <\/span>S&P 500 Bond Index<\/span><\/a> has averaged a 2.36% annual return over the last decade.<\/span> <\/span><\/p>\n\n\n\n

That\u2019s less than the current <\/span>CPI inflation rate<\/span><\/a> of 2.9%. To calculate the real return on a bond, you have to subtract out inflation. It\u2019s one of many reasons I <\/span>invest in real estate instead of bonds<\/span><\/a>. <\/span><\/p>\n\n\n\n

In our<\/span> Co-Investing Club<\/span>, we typically aim<\/span> for annual returns in the mid-teens or higher.<\/span> And no, high returns don\u2019t inherently mean high risk. Investments come with <\/span>more dimensions than just risk and returns<\/span><\/a>: Liquidity, time commitment, minimum investment, tax advantages, and other dimensions all play a role. These <\/span>other<\/span> dimensions make it possible to find investments offering high potential returns and low potential risk. <\/span><\/p>\n\n\n\n

And in fact, we focus primarily on risk when vetting investments together as an investment club. Here are a few <\/span>risks we take most seriously<\/span><\/a>. <\/span><\/p>\n\n\n\n

I also look at recession risk. Unlike most stocks, some <\/span>real estate investments protect against recessions<\/span><\/a> quite well. <\/span><\/p>\n\n\n\n

An 8% Withdrawal Rate?<\/span><\/h2>\n\n\n\n

Imagine you earned an average yield of 8% on your real estate investments and took a withdrawal rate of 5% on your stock investments in retirement. If you had a 50\/50 stocks and real estate portfolio like me, that would average 6.5%\u2014and wouldn\u2019t even require selling off any real estate holdings. <\/span><\/p>\n\n\n\n

At a 6.5% \u201cwithdrawal rate,\u201d you\u2019d only need around $615,000 to retire for that $40,000 <\/span>in<\/span> investment income. That\u2019s instead of $1 million at a 4% withdrawal rate. <\/span><\/p>\n\n\n\n

The exact numbers aren\u2019t the point, though. The <\/span>point<\/span> is that you should question conventional financial wisdom, and real estate can help you reach your financial goals much faster than a standard 60\/40 portfolio of paper assets. <\/span><\/p>\n\n\n\n \n

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