The Return Of The 60/40 Portfolio Plus Alternative Investments

The 60/40 portfolio is a classic investment portfolio consisting of 60% equities and 40% fixed income. If you are within five-to-ten years of retirement or are in retirement, a 60/40 portfolio is a common recommendation.

Thanks to a low or negative correlation between stocks and bonds, soon-to-be retirees or retirees have been encouraged to hold a good amount of bonds to reduce volatility and risk compared to an all-stock portfolio.

Negative correlation between stocks and bonds

As someone who is currently focused on de-risking his portfolio before re-retiring, I'm considering a 60/40 asset allocation to help protect my gains. Stocks are expensive at 23X P/E in 2024 and we've been in a nice bull run since 2009.

I don't want to lose my gains since the pandemic began. At the same time, I still want to benefit from any further upside, largely due to unrelenting inflation.

My rollover IRA, for example, was 100% equities, 0% fixed income for the past 5+ years. I used equity structured notes to help dampen the portfolio's volatility and offset some of the downside risk. That said, it was still essentially 100% equities.

Recently, however, I rebalanced the portfolio to 95% equities, 5% bonds, partially because Treasury bonds are yielding over 5%. But I need to do more.

Let's review the benefits of a 60/40 portfolio and discuss why adding other alternative investments may make sense.

The Benefits Of A 60/40 Portfolio

Here are three main benefits of a 60/40 portfolio. If you are already retired, you want to reduce risk to increase your chances of your money outlasting you. A 60/40 portfolio may be appropriate if you have a much higher percentage allocation to stocks.

1) Solid Historical Returns

Since 1987, the 60/40 portfolio has posted annualized returns of roughly 9.16%. In the last 10 years, the portfolio achieved a 9.76% compound annual return, with an 8.45% standard deviation. This is in spite of ever-falling interest rates since the late 1980s.

A substitute for the 60/40 portfolio is the Vanguard Balanced Index Fund, VBINX. You can also construct a 60/40 portfolio using VTI for equities and BND for bonds.

Note: depending on how you construct the 60/40 portfolio, I’ve seen the historical annualized returns are anywhere from about 7.6% – 9.16%.

60/40 portfolio returns over time
Source: LazyportfolioETF.com

2) Lower Volatility

While the 100% equity portfolio holder was having a heart attack in March 2020 when the S&P 500 crashed 32%, the 60/40 portfolio owner was likely feeling better with his portfolio down only ~22% from peak to trough. Your stock allocation matters depending on your financial stage in life.

As someone who hates volatility, a 60/40 portfolio would help improve my mood and my happiness during another market correction. When you are retired, your goal is to try and think the least as possible about your money.

60/40 portfolio volatility vs. all-stock portfolio
Source: PIMCO

3) Higher income with a 60/40 portfolio

The final key benefit of a 60/40 portfolio is higher income. Depending on how you structure your equity holdings, you will be able to receive dividend payments.

If you invest entirely in growth stocks, you will likely not receive any dividend payments as retained earnings get reinvested into the company. However, if you invest in the S&P 500 or dividend aristocrat companies, you should be able to earn at least a 1.5% dividend yield.

The bond portion of your portfolio will then provide steady coupon payments (interest payments) as well. You could either own bond funds, individual bonds, or a combination of both.

In 2020, a 60/40 portfolio produced a 2.04% dividend yield, which was more than 3X the average 10-year bond yield that year.

As a retiree looking to live mainly off passive investment income, a 60/40 portfolio helps you better achieve this goal than an all-stock portfolio.

60/40 Portfolio Growth Chart

The Rise Of The 60/40 Portfolio

For many years now, many pundits have claimed the 60/40 portfolio was dead. They thought the secular bull market for bonds was over. But as we know, interest rates kept coming down and bonds kept going up. As a result, the 60/40 portfolio continued to perform well through 2020.

However, now that interest rates have risen, the attractiveness of a 60/40 portfolio should be higher. Based on the returns chart above, a 60/40 portfolio increased by only 2.47% YTD 1Q2021 compared to a 6.17% increase in the S&P 500 during the same period. Given the huge decline in bonds, the underperformance of a 60/40 portfolio is to be expected.

However, as an investor, we must be forward-looking. When the 10-year bond yield was at 0.51% in August 2020, the yield was not attractive enough. I wasn't afraid of deflation either.

But with the 10-year bond yield around 4.5% today, bonds are relatively more attractive. Bond yields have been rising because inflation is high and the Fed has signaled it will be raising rates.

With strength in stocks and a decline in bonds since the pandemic, constructing a 60/40 portfolio is looking more attractive. As interest rates rise, it is logical to want to allocate more capital to bonds and less capital to stocks.

60/40 portfolio annual average total return compared to stocks and bonds

The 60/40 Portfolio Plus Alternatives

Since the 60/40 portfolio was first popularized decades ago, a lot of new asset classes have also become more available to the investing public. As we learned in a previous article on how the rich and endowment funds invest, a greater portion of a portfolio has been going towards alternative investments.

These alternative investments mostly consist of real estate, farmland, private equity, hedge funds, and commodities. Now cryptocurrency is becoming more popular, although much more volatile.

Below is a returns chart of various publicly traded assets and real assets from (1992 – 2020). What do you observe?

performance of stocks, bonds, farmland, real estate, US REITs, Gold and Sharp Ratio

Farmland Performance

The asset with the highest mean return was Farmland at +11.01%. Farmland also had the second-lowest standard deviation of 6.9%, meaning it was the least volatile asset. Finally, farmland had the highest Sharpe ratio of 1.21, which means it had the highest risk-adjusted return.

Sharpe Ratio = (average rate of return on the investment – the risk-free rate of return) divided by the standard deviation of the investment. 

US REITs Performance

US REITs had the second-highest returns with 9.86% annualized returns from 1992-2020. However, as mentioned in my post on how real estate gets impacted when stocks sell off, US REITs are often more volatile than stocks. With a Standard Deviation of 18.31%, US REITs have the highest amount of volatility.

During the March 2020 meltdown, US REITs melted down even more. Therefore, my observation in real-time back then was that if you want to smooth out volatility, US REITs are not the way. We now have more data to back up this claim.

My favorite private real estate platform is Fundrise, which manages over $3.5 billion for over 500,000 investors. Fundrise focuses on residential and industrial real estate in the heartland, where valuations tend to be lower and yields tend to be higher.

Fundrise

Gold Is Not A Good Hedge

On a risk-adjusted basis, Gold is the worst asset class out of the six highlighted above. With an annualized return of 6.4% and a Standard Deviation of 14.91%, Gold has the second-worst returns with the highest volatility. Further, Gold produces no income.

Therefore, Gold is not a great addition to a 60/40 portfolio. It neither performs as well as US Stocks or hedges as well as US Bonds, Farmland, or US Real Estate. It seems like investors are slowly moving away from Gold and are replacing it with Crypto.

That said, gold has done very well post pandemic. So you never know.

US Bonds

Finally, we get to US Bonds, where the returns are the lowest at 5.46%. However, the Standard Deviation for US Bonds is also the lowest at 4.55%. Therefore, US Bonds are an effective way of dampening volatility and providing a hedge in a 60/40 portfolio.

Farmland Outperforms During Recessions

We understand that spreading a portfolio across multiple uncorrelated asset classes reduces volatility and protects returns from exogenous shocks. Therefore, instead of just investing in Bonds in a 60/40 portfolio, perhaps investing in Farmland as part of the 40% is a good idea.

After all, Farmland has provided double the historical returns compared to US Bonds (11.01% vs. 5.46%). Its Standard Deviation (6.9% vs. 4.55%) is only slightly higher. Given the increasing scarcity of Farmland and increased food consumption, Farmland should continue to perform relatively well as an asset class.

Below is a chart that shows the NCREIF farmland index delivered positive returns every quarter in which the S&P 500 declined. For example, during the Global Financial Crisis when the S&P 500 declined by 46%, NCREIF actually went up 17%.

Related: Historical Returns Of Stocks And Bonds

Alternative Investments For Diversification

For long-term investors interested in diversifying into alternative investments beyond the 60/40 portfolio, real assets are an attractive option. Real assets such as farmland and private real estate offer yield, less volatility, and diversification.

Personally, I've invested $954,000 in real estate crowdfunding platforms like Fundrise and CrowdStreet to earn more passive income and take advantage of inflation. With inflation elevated, rents and property prices are rising. Further, I want to invest in the Sunbelt/Heartland thanks to positive demographic trends.

Both platforms are sponsors of Financial Samurai and Financial Samurai is a six-figure investor in Fundrise funds.

Invest In Private Growth Companies

In addition to real estate and the 60/40 portfolio, consider investing in private growth companies through a fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

One of the most interesting funds I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

The investment minimum is also only $10 while most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

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28 thoughts on “The Return Of The 60/40 Portfolio Plus Alternative Investments”

  1. sherman Ober

    I’ve been an advisor for 37 years. Beacon Capital Management is significantly better than a 60/40. Equal amounts into the 11 sectors of the S & P 500 using Vanguard ETF’s. 10% stop loss. If the model drops 10% from the peak they go to 100% Bonds with Vanguard. Then their algorithm determines when they get back in. Look at the aggressive growth returns on page 3. It allows an investor to be 100% in equities for growth and only use bonds as a protection after the 10% drop. file:///C:/Users/spobe/Downloads/Vantage_2.0___10312021%20(1).pdf

    Positive returns in 2001, 2002, 2008. Let me know if you can’t open the site and I can email it to you.

  2. “When you are retired, your goal is to try and think the least as possible about your money.”

    Oh dear, Sam. I think we get what you meant though.

    Even so, I have established there is a tipping point, not unlike the continental divide, for retirement planning. If you can reach a certain number, then your personal wealth will only continue to increase, perhaps even if you substantially increase your annual spending after retirement.

    Fail to reach that number by the tiniest margin possible and, until the day you die, your personal wealth (and security) will only decrease, possibly even if you become extremely frugal. How many times have we heard, “I’m retired; I’m on a fixed income, ya know”? What a terrible thing to worry about which will end first, your life or your savings.

    My retirement goal is to get things across that tipping point (actually, I believe I already have) and keep on going for a bit to make sure I’ll never have to discover (when it is too late) that I just didn’t go quite far enough. Discovering that would surely mean I could not, “think the least as possible about your money.”

    Because that tipping point, while a very precise number, is one we can’t be certain of. It is a blurry target, given that we don’t know the future. I already hear tell that the tax rates and brackets we were assured of through 2025 are possibly going to change well before that date.

  3. Thanks, this is timely for my husband and me. We are 48 and planning to retire in 2 years. We are heavy in growth equities and looking to de-risk. We are 90/10 stock/cash, excluding our home, and know we need to change this. It’s a tough mindset switch for me after being in the accumulation phase for so long, but we are now looking to move into bonds and maybe dividend stocks.

    Question…do you think it makes sense for the bonds and dividend stocks to go in our taxable accounts or retirement accounts (or both)? I always hear “put bonds in tax advantaged accounts”, however since we want to protect our taxable accounts to use until 59.5, we’re considering bonds in taxable. Although my husband and I are not in total agreement on this. Thoughts on diversification in taxable vs. retirement when retiring early?

    1. Depends on if you need the income to pay for retirement or not. Also depends on your income in retirement and tax rate.

      I own muni bonds in my taxable accounts so I don’t have to pay tax on them.

  4. I’m a regular reader who really appreciates your blog with its diverse and always interesting topics and well thought out ideas. I may have missed it but rarely see much about dividend growth investing. What are your thoughts especially as a source of growing passive income and protecting against inflation?

    1. I do like investments that spin off dividends far better than being heavy on bonds. The assets often appreciate over time and a mix of dividend investing in high dividend stock funds, Reits, etc. They round out my portfolio nicely, and will be excellent in retirement where i can maintain a lower level taxation base I will use the dividends only and allow the principle to continue to grow. Dividend based investments with index funds are a good mix for me as I am not fond of a significant portion in bond funds. Dividends often grow over time to keep up with inflation while bonds have little risk but not much upside and are sensitive to inflation rates. I’m not a fan of being heavy in bonds, even in retirement but that is just my risk tolerance. I can certainly understand those that decide otherwise. I prefer to diversify by other means.

  5. I’m about ready to move forward on investing in farmland through FarmTogether. Am I reading correctly when the holding period is 10 years and you make dividends every year then one large balloon payment at the end of the term?

    Their projections look to be almost double your investment at the end of the 10-year holding period.

    1. Hi Steven – It depends on the investment. But yes, private investments generally have a hold for years with dividends/distributions over the years and then a balloon payment at the end. Hence, you need to make sure the money you do invest in private investments is money you don’t need to touch for a while. Definitely ask these questions about terms before making any private investment if you are not clear.

      Personally, I like to lock up a lot of money to let it compound. It makes me not think about it and not worry about it during volatile periods.

    2. Jackson Mikalic

      Hi Steven – Jackson from FarmTogether here. We appreciate your interest in our offerings!

      You are correct; on average, our offerings have a term of 10 years. Some deals are slightly shorter in duration and some longer. If for any reason, you should need to sell early, FarmTogether will assist you on a best efforts basis in locating a buyer should the need for liquidity arise before the end of the target hold period. We are also planning to introduce a secondary liquidity market later in the year.

      Farmland produces returns in two ways: income and appreciation. Income can come from our tenants (farmers) who pay rent for the leased land or from revenue generated by farming operations. Appreciation will be realized upon the sale of the property – the difference between the purchase and sale prices, hence the larger payment at the end of the deal’s life. Gains are generated from property improvements and long-term trends driving rising land prices, such as the decreasing supply of farmland and growing population as an example.

      Happy to answer more questions or elaborate on any points made here. Please feel free to contact me at jackson@farmtogether.com.

  6. Bit confused. Recently you mentioned in newsletters and some articles that you hate risking more than 30% in stocks and in fact dialing it down to 25% in stocks.
    Your portfolio alloc seemed to be 30% in stocks, 40% in RE, 20% in bonds and some cash.

    Are you steering your IRA to 60/40 or your entire portfolio?

    1. Yes, I’m slowly de-risking my IRA. And a 60/40 split is something I’m strongly considering. My rollover IRA is part of my public investments allocation. It is confusing b/c I compartmentalize my portfolios and have a complicated net worth. For my public investments, I want to reduce my equity weightings.

      What is your public investment asset allocation and net worth allocation look like? Do you plan to adjust you asset allocation? What is your view of stocks, bonds and the economy going forward? thanks!

  7. Sam, Do you count your equity in your primary residence as your percentage of real estate allocation?

  8. My allocation is 90/10. 90% diversified index funds, individual stocks (small portion), , dividend paying stock funds and 10% tax free municple bonds at 3.3%. I will be in the position to retire, if wanted, to retire in 2 years but will work longer as I enjoy what I am doing. I plan to live off of dividends off of the investments and let the principle grow over time. Living off the dividends from investments makes provides piece of mind with the ups and downs in the market as the returns in the long term will far outpace bonds.

  9. I think you should include investment real estate and calculate your overall allocation. I have 5 categories: Equities, Bonds, Cash, Real Estate, and Other (for me crypto). Cash includes money market and ultra short bonds. My current allocation is a little rich in equity but has done well. I’m 66% equity, 15% Bond, 10% Cash, 8% Real Estate and 1% Other. Moving slowly to a more conservative position.

  10. Sam
    A very timely article as I’m currently wrestling with the 60/40 option or an alternative I’ll share momentarily. While I like the long term performance of the 60/40 my concerns are going forward won’t the bond portion simply be a negative drag as interest rates have nowhere to go but up? Even if it is a slow rising rate environment that’s not conducive for bond performance? What about 60% equities and 40% in T / IRM / MO yes they are stocks but dividends are 5-6% and not all that volatile, they also don’t offer great upside growth either?
    Thanks and welcome feedback

  11. I plan to retire in five years.

    In my (tax-advantaged) retirement accounts I hold 80% equity (50% S&P, 15% tech growth, 15% dividend paying funds such as PFF, LAND, XLP) and 20% cash for opportunistic tactical allocation ( such as taking advantage of correction/crash,etc). Outside retirement accounts I mostly hold rentals and continue to accumulate Fundrise investments and BRK-B.

    I do not see any reason for holding bonds at this point. I plan to only rely on net rental income and dividend income for retirement. In that sense, the equity holding horizon is essentially forever so my tolerance for volatility should be high.

    Is my plan sound? Please kindly point out if I have missed anything thing. Thanks!

    1. Don’t know your net worth or overall net worth breakdown.

      But investing in real estate is like investing in bonds, albeit with more risk. Of course, it depends on what type of real estate and bonds you are comparing as well.

      If you feel comfortable, that’s all that matters. Look back to how you felt in March 2020 with the S&P 500 went down 32%. If you were OK, then you are good to go.

      1. Money Ronin

        My portfolio mix is similar to Diana’s. When the market tanked in March 2020 I saw that as a buying opportunity but my plans were foiled. I knew prices would come back eventually.

        What gave me a heart attack were the rent and eviction moratoriums. I had to hoard cash to prepare for rent collections going off a cliff. While I did have several non paying tenants (maybe 10 to 15%), it wasn’t a disaster. But as a landlord, I couldn’t count on government assistance. I needed to be financially prepared.

        BTW still waiting on the Federal rental assistance passed recently. Not every landlord had the means to weather the cash crunch.

  12. I wouldn’t bet that bond yields won’t rise much much higher. Commodity prices have been going up steeply and the Fed and other central banks seem happy to let inflation run higher for a while. Will they really stop inflation by raising short term interest rates like they have done in the past, or with the huge government debt will that seem politically infeasible… I’m not going to bet that they will go much much higher either :) I have a 60/40 allocation with the 60 including hedge funds and private equity (25% of the portfolio is allocated to long-only stocks). The 40% includes 10% in bonds, 10% real estate, 10% gold, 5% art, 5% futures. I think gold can be a good hedge but only if you rebalance with the other assets over time. Post 1971 gold returns seem pretty good.

    1. You would think the 10-year bond yield would go higher with so much building inflation. However, I think 2% is the cap for 10-year yield this year.

      To get to 2%, the S&P 500 would likely have to get to 4,500+ this year. I hope it does, but I doubt it.

  13. A 60/40 portfolio definitely is more attractive now that the 10-year bond yield is back to 1.5%+ and bonds have sold off. I don’t think the 10-year will rise above 2% this year or maybe not even next year either.

    A 60/40 portfolio is a tried and true portfolio I can get behind b/c I’ve had one for over a decade and its worked out great!

    1. Doug Eggemeyer

      It is tried and true in a bond bull mkt, which is no longer the case. 6% bond returns are gone

  14. I like the 60/40 ratio. I have a good split of stocks and bonds right now. I may consider adding some more alternatives but nothing significant

  15. Interesting analysis, thanks for sharing! You don’t hear too much about 60/40 these days. It seems most people maintain a higher allocation of equities. I currently have a much higher equity allocation myself but I am still in the accumulation phase and not considering retirement in the super-near future (but hopefully somewhat soon). I imagine in your position, being close to re-retiring, the lower volatility of a 60/40 allocation is a lot more comforting.

    1. Yeah, if you are under 40 or still have 20+ years before retirement, a 60/40 is likely too conservative. But a 60/40 portfolio is looking very attractive in my situation.

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