60/40 Asset Allocation: A Loosing Wall Street Cookie-Cutter Formula for Unaware Ultra-High Net Worth Investors
What a True Fiduciary Will Tell You about the Failures of 60/40 Performance
When the dotcom crash hit in 2000, one of the big differences between then and now for investors was the bond market.
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 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.
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 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 markets collapse 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 life style. 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 and appetite for losses!
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.
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 different investments 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 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.”
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.