The Classic 60/40 Portfolio

The benchmark of all benchmarks, this is the de facto traditional asset allocation portfolio: 60% in a broad equities fund, 40% in a broad fixed-income fund.

Breakdown of the Classic 60/40

This is the portfolio that was the extent of my thinking of my retirement-age portfolio for a long time, and still is in many cases the default for many retirees. It is as basic as you can get: 60% stocks and 40% bonds, with the idea that the growth comes from the stocks, with the bonds in there to smooth the ride. It’s also the portfolio that William Bengen investigated in his paper about the 4% Rule, and the one that Ray Dalio has responded to with the All Weather portfolio.

While I no longer see this portfolio as a realistic option for my own retirement years, I’m tracking it as a baseline case and for comparison’s sake with other portfolios. It has a standard deviation of 11%, which was then my target for the RPC Income portfolio, and is also in the range of two popular Risk Parity inspired portfolios: the Golden Butterfly (by Tyler, the creator of Portfolio Charts) and the All Seasons portfolio by Ray Dalio (as adapted in a book by Tony Robbins). The main merit for 60/40 is its simplicity, both in terms of tracking and withdrawing from. For this portfolio, the withdrawals beyond dividends received are very straight-forward: you just pull from the one that is above its target allocation.

In terms of the expectations for this portfolio based on the backtest scenarios, there really isn’t much to recommend. Of the ten portfolios I track, it has the second lowest annual real return and the second lowest Perpetual Withdrawal Rate, while also not doing that well in avoiding painful drawdowns. In fact, it had the third longest expected drawdown, and had an Ulcer Index of 10.1, even higher than the aggressive RPC Growth portfolio. Going forward, I suspect that it will be one of the worst performers of the bunch. It is simple to follow, for sure, but this seems hardly enough of a reason to sacrifice return (if compared with portfolios of similar volatility) or to justify the extra headaches (if compared with portfolios with similar expected returns).

One last point is that this is the portfolio that people tend to use when discussing the viability of the 4% rule in retirement. Then, when people see its (poor) performance, they shift to recommending a lower withdrawal rate. In one case, Wade Pfau recommended that the 4% rule really should be the 2.4% rule, since even 4% stretches this portfolio. But what if you construct better portfolios, with greater attention to how you combine diverse assets to improve return and reduce volatility? I don’t think it's the withdrawal rate that is the issue, or rather not that alone, but rather the portfolio itself. If we can design better portfolios that incorporate the insights of risk parity, we can see how those do and compare to this one.

Here is the Correlation Matrix (Data from 2009; credit to Portfolio Visualizer):

Correlation Matrix for Classic 60/40

And, the Backtest Analysis (Data from 1970; credit to Portfolio Charts):

Backtest for Classic 60/40