Following the Herd Won’t Save You. 60-40 vs 80-20 Portfolio Stocks, Bonds Not Enough

In 2000, bonds were paying nearly 7%. Today, bonds are paying out at all-time lows.

Why does this matter?

Because in 2000, if you had a 60/40 split – 60% stocks and 40% bonds in your portfolio – you weathered the storm better than investors overly weighted in stocks. Those high bond yields helped somewhat compensate for the battering taken by stocks. Before we get into it much deeper we suggest those of you with between $5 million and $500 million Liquid Investable assets download this valuable investing guide by clicking here.

But today, in the midst of the coronavirus crash, that bond yields cushion isn’t nearly as fluffy with 10-year Treasury yields being at all-time lows. The following article will give you insight into the asset allocation portfolios.

Understanding Asset Classes

Hundreds of sectors or industries trade their assets on the stock market. If you look at the S&P 500 index, there are several sectors that are available such as industrials, health care, technology, real estate, and many more. Those sectors can be differ based on several aspects. Those aspects are:

Risk vs Return

The stock’s price is depending on the growth sometimes, but the other is value. Some stocks will give you a high dividend price, while others use the profit to reinvest. If you are expecting a high return, then you need to risk more.

Capitalization

There are hundreds even thousands of multinational companies on the stock market either from small to large size. The value of the company determines the capitalization and the shares multiply by stock price every day.

Asset Allocation for Stocks and Bonds

Speaking about the investment, it means you have to know about asset allocations. Basically, asset allocation is the way you are dividing your assets into different classes. Your asset can be in the form of cash or securities, stocks, and bonds. Based on those asset classes, the main goal of allocating your asset is to maximize your return and minimalize the risk. In allocating your assets, you have to make a priority list that is from aggressive to the safest that can affect your return. If you ask about the portfolio percentage, the calculation is based on the risk tolerance and time horizon. If you still confused about what are the types of asset allocation, here is the explanation:

Ultra Aggressive Portfolio

If you wish that you will get 9% or more for the returns, you should allocate your stocks 100% it means that your portfolio only contains stocks. This portfolio allows you to get stable capital growth for the long-term. However, in the short-term, this kind of portfolio widely varies.

Conservative Portfolio

Some people do not want to risk their capital. Therefore, they choose the ‘safer’ way of allocating their assets. If you want to keep your capital rather than acquiring high returns, this kind of portfolio is suitable for you. You need to allocate not more than 50% on stocks. However, if you do not want to use stocks at all, you may be tempted that stocks can help you to offset the inflation.

Moderately Aggressive or 80/20 Portfolio

If you are considering having a long-term target and wishing rate of return at least 8% or more, you need to allocate 80% of stocks to your portfolio and the rest is to bonds or cash. This kind of portfolio is considered to have a medium level of risk tolerance.

An Aggressive Portfolio

This portfolio is focused on the equities, that the value can be change daily. The main goal of using this portfolio is to acquire long-term capital growth. This portfolio usually called a capital growth strategy.

Asset allocations are very important as this will affect your returns in the future. The asset can be in the form of bonds, stocks, or others. In fact, your decision in allocating your asset can be very crucial. An investment expert said that it is better if you are not allocating 100 percent on stocks. This argument is debatable because if you are lucky in the stock market, you will gain a high return even it is highly-risky.

The 60/40 Wall Street Myth of Stability

All too often we talk to prospects who come to us shocked that they have lost so much money. They were convinced that their advisors had been managing their money well.

But the truth is usually unveiled during vicious crashes like that of Covid-19.

When we look at their portfolios it blows our minds how frequently they are 60/40, or due to neglect by their advisor (neglected to rebalance or were greedy when times are good), they started as 60/40 and they are now 70/30 or even 80/20! No wonder they lost so much money.

Many of the biggest pensions and investment firms use a 60% stock/40% bond asset allocation, in part because it is considered more stable than ones more heavily weighted in stocks, but also more lucrative than ones leaning more toward bonds.

However, what does historical data actually show about the performance a 60/40 split?

From March 2000 until March 2020 – a 20-year period – a 60/40 split earned 5.27% annually while the S&P500 made 4.79%. And that’s before taxes and fees. It actually beat the market. No wonder Wall Street uses this as a cookie-cutter formula to sell high and ultra-high net worth investors on this model.

However, it is also true that from Oct 2007 through March 2009, a 60/40 portfolio lost about 33%. To make things worse, it took this 60/40 model 603 days to recover back to even.

Imagine retiring October 2007 and entrusting your $30 million to a money manager or Wall Street/Big Bank financial advisor who, based on the firms’ pre-determined cookie-cutter investing (YES, that’s how they do it, even the biggest and so-called best), placed you in what amounted to a 60/40 model! Now imaging the collapse of the market and bottoming out March of 2009, similar to what recently happened with Covid-19. You would have lost about $10 million excluding the withdrawals you would have made to sustain your lifestyle. Here you are in October 2007, with the mindset that you will never spend all $30 million you worked so hard to save, thinking how did I get here (with less than $20 million in savings) and will my money last my lifetime!

For high net worth and ultra-high net worth families – especially those within five years of retirement or already retired – you might not have time to make up your losses. Chances are, you also don’t have such an appetite for losses. It is time for you to prepare your portfolio that can ease you to enjoy your ‘nest egg’ day.

If you agree 60/40, 70/30 or 80/20 asset allocation strategies have failed you, but you’re ready to take action, perhaps a short chat with our CEO and Co-founder, Hutch Ashoo is in order. As a fiduciary, independent financial advisor, he advises high and ultra-high net worth investors how to protect their wealth and maximize gains, offering the best of both worlds.

What Does Your Financial Advisor Say about 60/40?

The question is – why would you want to risk losing $10 million of your investments just because so many others are using the same strategy?

And if you have a wealth manager or financial advisor who calls themselves a fiduciary, are they really acting in your best interests if they aren’t sharing this historical performance data with you? Honestly, we truly believe most financial advisors don’t even understand the risks themselves. They are merely foot soldiers to the Wall Street firms and Big Banks. They are given a program to evaluate you and then place your money is what is most likely 60/40. Then ‘stay the course is the best advice they have to offer while you’re losing millions?

Pillar Wealth Management takes our fiduciary duty very seriously. We refuse to blindly follow what everyone else is doing when real performance data from history shows how fraught with peril that approach really is.

The 60/40 approach fails miserably in a major market crash. And in the current crisis, it is failing again, down over 12% as of March 17th, 2020 since the peak in February.

So shouldn’t we be looking for something better?

What to Do Differently

We want you to make good money during good times but not lose it all during bad times. As you have known that the market volatility for the asset class is high.

We have developed a few methods to help our ultra-high net worth and high net worth clients capture much of the gains but less of the losses. We custom build these models for each client since prospects come to us holding a different investment process and we don’t just blindly sell everything to buy a cookie-cutter model. It is very possible to achieve similar levels of performance to 60/40 but while controlling down-side risk!

In other words, performance was strong in good years, but held its ground in the downturns.

We are so focused on principal preservation that we wrote the book about it, The Art Of Protecting Ultra-High Net Worth Portfolios And Estates, Strategies For Families Worth $25 Million to $500 Million. You can buy it on Amazon by clicking here.

How Is Your Portfolio Doing During the Current Crisis?

If at this starting point you are wondering if you have the right financial advisor to truly serve your ultra-high net worth needs then we urge you to download our free 2020 Covid-19 updated book The Ultimate Guide To Choosing The Best Financial Advisor, For Investors With $5 million to $500 million liquid assets by clicking here.”

Imagine that something worst happens because you are in the bear markets where average annual prices of securities drop by 20%. If you’re feeling the pain of loss that many others are experiencing and your wealth manager’s best advice is to ‘stay the course’ and trust that ‘markets always go up over time,’ we would respectfully suggest that you need a new wealth manager.

Those boilerplate platitudes don’t serve anyone well, especially ultra-high net worth investors who don’t want to wipe out the last ten years of growth because their advisor stuck them with a 60/40 split and told them it would hold up.

It won’t. And it isn’t.

As an ultra-high net worth investor, you deserve better.

60/40 asset allocation is flawed. It’s one reason why Pillar Wealth Management refuses to sort investors into cookie-cutter, one-size-fits-none investment plans.

You deserve a custom-prepared investment developed specifically to you and your wealth goals.

To find out more about our custom investment plans for high and ultra-high net worth clients, we encourage you to have a short conversation with our CEO and Co-founder, Hutch Ashoo. With over 30 years of experience in bad markets as well as good, Hutch can give you the objective, independent guidance you need right now.

Schedule a chat with true fiduciary and ultra-high net worth wealth manager Hutch Ashoo

Authors

To be 100% transparent, we published this page to help filter through the mass influx of prospects, who come to us through our website and referrals, to gain only a handful of the right types of new clients who wish to engage us.

We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.

You see, our goal is to only accept 17 new clients this year. Clients who have from $5 million to $500 million in liquid investable assets to entrust us with on a 100% fee basis. No commissions and no products for sale.

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