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Why a 60/40 Portfolio is Not for You

Summary

The majority of advice online is too generic to take seriously for your personal finances. The 60/40 portfolio (60% stocks and 40% fixed income) is used in academic research and might be the median portfolio for retirees - but that doesn’t make it appropriate for you.

How should you construct your own portfolio for now and the future? Think about when you are going to spend your money and divide it into three categories:

  1. 1-2 years: Invest this in CDs, checking/savings accounts or money markets
  2. 3-7 years: Invest in a mix of bonds (or a bond fund) 
  3. 7+ years: Invest in stocks

I recommend taking out a piece of paper, dividing it into 3 sections and write out the actual dollars you might spend in each section, beyond what your income will cover.How might this apply to you?  

  1. If you are young, just starting your career maybe you want $30k for a home down payment (1-2 years) and the rest is for retirement (7+ years)
  2. If you've been working for10 years and are mid-career with a young family: Maybe $50k towards college costs (3-7 years) and the rest for retirement (7+ years)
  3. Near or in retirement: Living expenses (1-2 years and 3-7 years) and the future (7+ years)

The point is: apply this to your situation with actual dollars. At that point, you can figure out the percentages in each category: stocks, bonds, and cash.

Resources:

Transcript

Mike: [00:00:00] Welcome to financial planning for entrepreneurs and tech professionals. I'm your host, Mike Morton chartered financial counselor and financial advisor. Today. I have a great conversation with my good friend, Matt Robinson on his on-air radio show. Where we're talking about why the 60 40 portfolio is not for you.

This is generic advice that does not apply to your situation. So what should apply instead? That's what we get into in today's show. I hope you enjoy it.

Matt: [00:00:31] . I'm joined as always by legendary financial advisor. Mike Morton of Morton financial advice. Mike, how are you? Yeah, 

Mike: [00:00:38] Good Matt doing well.

Matt: [00:00:40] Look, we're all legends in our own minds. Although in your case, look you've really got heck of a business going providing financial advice, especially to entrepreneurs, tech professionals people who don't have the time to really think about all this stuff, but want to have a smart, personal investing strategy.

And so it's really a pleasure to be able to share some of your insights with all of our listeners. And you suggested that today we should talk about why a 60, 40 portfolio is not for you. So I have a very technical question to ask you. What's a 60, 40 portfolio, Mike Morton. 

Mike: [00:01:15] It's a good question. 

Matt: [00:01:16] Thanks. I'm also a legendary professional. I know how to ask what are things that I don't know, 

Mike: [00:01:22] You don't know, it's always a good 

Matt: [00:01:24] always a good idea to ask. 

Mike: [00:01:25] It's 60 40 portfolio is 60% invested in stocks and 40% invested in fixed income, bonds and cash. And so this is the type of portfolio that when you're Googling around or especially in retirement, so people that are getting ready to retire in retirement, everything is a.

60 40 portfolio. So I see it all the time. And the news today, is the 60 40 portfolio dead. That's what the headlines are because bonds returns are so low. We've had great, for the last 20, 30, 40 years, the bonds I've done really well, but since interest rates are so low, now that people are questioning the 60, 40 portfolio.

So it's just the kind of classic. Portfolio. And so I thought today we would talk about why this portfolio is not for you.

Matt: [00:02:14] makes sense.  Actually, I like how this is in the sweet spot of where this show operates, which is we're not way, way down in the weeds. But, we're going to go  a few click depths down below what you'd find on Google, which is look, that's the point. That's often what you really need to do, because as you just said, everyone's individual situation truly is different.

So generic advice is generic for a reason, it's a dead average. And by the way, speaking of dead it may be based on things that made sense when someone. Put something up on, an article that you found on Google five or 10 years ago may not apply to individual situations may not apply to today.

Okay. So going a couple of click depths down if the 60 40 is not like that dead average that should apply today and should apply to you anymore. What should people be thinking about instead? 

Mike: [00:03:08] right. So the reason I say this is not for you is because it is generic advice. And you really need to think about your own personal situation. Just a little bit more. I'm not saying, you've got to go out and do a tunnel work and read a bunch of articles and books, but you do have to think about your situation.

Just, a little bit deeper than reading a couple articles and say, oh, I should just be 60, 40.  That's what the advice says. So in today's episode, we'll talk about how to do that. What's the process, very simple process for figuring out. What kind of mix of stocks and bonds will make sense for you going forward.

So on that note, and to just give a little story about this, you would think in retirement, you want a conservative portfolio, right? Hey, I, I only have one shot at this retirement. I don't want to, blow it all on a stock market that crashes or stays flat for a number of years.

Why have a client who's getting older, she's 90. And so you would think. Yeah. You need to be pretty conservative and it's the exact opposite. She should be invested about 80 to 90% in stocks 

Matt: [00:04:10] stocks. 

Mike: [00:04:11] and hardly have any fixed income at all. And why is that? Because think about her longevity, she's almost at the end 90 years old, she's doing great, but not a lot of years left and she has a big portfolio.

She can't possibly spend it. And if she can't possibly spend her portfolio, then she needs only 10 to 20% of it to be in that fixed income for the next five or 10 years, if she has that and the rest can be invested for the far future. So you wouldn't expect an 80 or 90 year old to be invested so aggressively, but that's the point is that you have to figure out what makes sense for you.

Matt: [00:04:50] wow. Very counterintuitive. Very interesting. All right. I can see that there's a lot of curve balls in here, given that there are curve balls in here. Maybe take us to the start of the process of trying to unwind what your own. Individual situation is so where do you start when you're thinking about this with a client 

Mike: [00:05:10] Yep. The starting point is to try to map out your cash needs. And this can be a little daunting at first. Like I'm not sure what I'm spending even next year, let alone in five or 10 years, but you try to map out just a few bullet points on what you need in the short term. So if you're saving a down payment for a house, you're young and you don't have that first starter home yet.

Maybe that's on your list. Maybe you need to save for education for your kids. You've got kids and you want to save for their future education. Everyone's saving for retirement. Everybody would like to, eventually stop working someday and spend time doing other things. So map out your cash needs short term one to two years.

Medium term the next three to five years. So years, three to seven, somewhere in there, medium. And then  the future, seven plus years or 10 plus years out. So look at those three areas. And this applies to everybody. Okay.  This could be a young person just starting their career. It could be the middle of your career, late career, or even in retirement, especially in retirement, take those three items and just map out about how much you would need cash wise in each of those buckets.

And then we'll get to how to invest those. And then back into whether you need 80% stocks, 60% stocks, 40% stocks, you know, what kind of portfolio makes sense for you?

Matt: [00:06:31] I see. So how do you map this? Let's say you're listening to this show and you're trying to think about those cash needs. How would you map that to your own situation? How would you?

think about 

Mike: [00:06:42] Yeah, so I'd literally take out a piece of paper. Don't do it now if you're driving and listening to this, but you can take out a piece of paper and just  draw lines down and have three different Parts of the paper and just put in   what you're going to be spending money on in those three different areas.

So let's break it down into different stages of life to make us a little more concrete. If you're young, you're just starting a career, maybe a middle career, and then maybe in retirement. If you're young and just starting career, maybe in that first column is say, I mentioned saving a down payment for a house.

Maybe you don't have kids yet. Maybe that's the only thing that you're really saving for. You've got 20, 30,000 already saved up and you're hoping to buy a house in the next few years. Okay. So that could be, oh, I'm going to need this cash soon. And probably the rest of the cash is for retirement. It might just be those two, like  medium term, I'm not sure.

Some extra vacations. I don't know. It just like saving off of your income. Spending off your income, but in terms of, budgeting, it's just long-term. So maybe just that, those two things, and that could be it. The middle of your career could be short term. What do I need cash for now?

Might be almost nothing. Might be like, oh, we're just, spending off of our income. But in the medium term, I've got college  coming up seven years, so we have that bucket and then of course, retirement, that's still 10 plus years away, maybe. Okay. So that's the way to think about it till you apply it to your situation is think what's in those,  buckets, depending on where you are in your career and your unique family situation,

Matt: [00:08:05] Got it. And First of all, you mentioned don't drive and draw, which I think is just. Fantastic advice. People don't just come here for the financial advice. There's also a ton of very helpful life, 

Mike: [00:08:16] We tried to throw in some tips here and there.

Matt: [00:08:17] these are not always obvious that one I think is obvious.

So   you mentioned earlier the store of your client. Who's 90 years old clearly very much in retirement. But what factors would lead you to, as you put yourself into these life situation buckets, that's where you start, but how do you add layer of complexity to that?

Because this sort of very generic advice. Of how much cash you need and where you are in the life cycle, doesn't apply to her per se. So how do you then extend beyond the , long career ahead of me mid career, et cetera. Where do you go from there? 

Mike: [00:08:56] well, again, the point of this exercise actually is to write down the actual cash dollars. So in her case, I'm 90. All right I need cash, to live right now, not working anymore. And then I need cash also for my expenses for the next. Five, 10 years okay.

50,000 a year for 10 years, I need $500,000 in those two buckets, you know, one to two years and then two to eight years. So there you go, 500,000. Now, if your portfolio is 500,000, that might be almost a hundred percent in that fixed income.  Now, because I haven't talked about yet, what does that mean?

now I know my cash is we're going to get to that in a sec. But now, I need 500,000. If you only have 500,000, that's all of it. But if you have 2 million, then that's only 25%. So 25% needs to be in those two buckets. And 75% is in the 10 plus a year bucket. So that's where it gets into your unique situation because of the generic,  advice.

Online has no idea where your portfolio is. So how would it know what percentages to apply to a portfolio? And that's why we always start with the actual dollars and plus it just makes sense in the human mind. 

Matt: [00:10:04] And does go back to the point of two 45 year olds just to pick a number, might be in very different situations. So like a generic average for them. How many kids do you have? Do you have children? Are you married? Are you living abroad? There's all kinds of considerations So doing this on a, how much cash you need basis kind of cuts through all of those generalizations 

and gets you to the specific analysis you need to do.  All right.

So you teased us a moment ago with the idea of like great, you've done arithmetic. good. First step. How do you then turn that into thinking about.

That portfolio breakdown. 

Mike: [00:10:43] I don't know about you, Matt, but I have 2.2 kids.

 Matt: [00:10:46] Yes, that puts you then slightly above the average replacement rate for the population, which by the way, we're not hitting in most countries of the 

world. So do what you will with that. You have 2.2 kids. I am looking 

forward by the way, for people that don't know, MikeMorton has three actual children.

I'm looking forward to you telling one of your children that they count as 0.2 of a child, but go on. 

Mike: [00:11:08] Well, I'll have to think about which one's going to be. Point two.

Matt: [00:11:11] Yeah, that'll be great nickname by the way. 

Mike: [00:11:13] You might have guessed that we have these three buckets, the one to two years, and then the sort of the next three to five years, and then the sort of seven year plus. So we're taking our dollars,  and  assigning them to these three different buckets. If I'm going to spend a dollar, I'm going to put a down payment and buy a house next year.

So I need that $50,000 to be there for next year. Then I need that, to not it down and value. It can't be 40,000. Suddenly the house I'm going to be able to afford went way down. So I need 50,000 in cash. If I need that in the next one to two years, I need that in fixed income in cash, you can put it in CDs.

You can put it in just a checking or savings accounts. You can put it into money markets. You could put it in very short term bonds. T-bills. Something that is going to be there and really not lose any value. And this is a very common question, Matt, right now Down payments for housing. You know, Housing is just skyrocketing everywhere and it's getting very unaffordable for a lot of people.

And so the questions are constant. What should I do with my down payment? I'm hoping to buy a house in a couple of years and the prices are going up so much faster than their down payment. And there's no good answer, man.  It's a tough environment, but you don't want that 50,000 to go to 40,000.

If you put it in some kind of investment. So  that's the place to start is one to two years, you have that cash that you've just put in there, and that needs to be basically in cash because it can't go down. Now, the next bucket, of course, you're going to spend it in two to seven years, somewhere in there.

That's where we get into bonds and trying to get some interest right now. Bonds are really tough these days. They're barely making anything. I understand that. Should it be a little bit different? Probably not. To be honest, it's all a risk and reward and the more you go out the risk spectrum trying to pick up two, three, 4%, you're getting into lesser quality bonds and they can go down in value.

So again, you put in your 50,000, it could go down to 45,000. Even though your interest payments are, are a little bit higher, 5%, instead of 2%, you actually lose value on the total investment. No real great answers there, but if you need that money in five years, if you need that dollar, you're going to spend it in five years, put into place that it's mostly going to be there in five years.

Okay. You might be able to supplement or maybe adjust but it mostly needs to be there. Finally, if it's a dollar you're going to spend in seven to 10 years or later, then that's a dollar that you can invest more aggressively. And I would put that into the stock market.

Matt: [00:13:36] As the philosopher Ferris, Bueller said, life comes at you fast. It seems to me that you could do this kind of analysis. You could do it with a professional like you, and really go through it. Are there situations, or have you even had clients where life comes at you fast and your plan changes, and therefore you think about that portfolio breakdown, you have to rethink, you have to redo it.

What would trigger that kind of. Re-analysis 

Mike: [00:14:04] any kind of life event and they happen every year. So yeah,  life does come at you fast and financial planning. Is all about the planning, not about a plan because the minute I hand a plan to somebody it's basically useless, life has moved forward , by a little bit. So it's all about the planning process, but this is what's great about this.

It didn't take very long to write those three buckets for yourself. You got a piece of paper you write down. Here's what I need to spend in the next few years. And now you've got that. You can revisit that every six months, every 12 months or whenever a life event happens. I'm moving new job, new family situation, just revisit that I'd recommend storing that somewhere that you have.

And it definitely, every year it's oh, we put down that down payment. We have that house now. We don't need that anymore. What else do we need? And so you revisit and adjust that plan as life goes forward.

Matt: [00:14:54] we talked in a recent episode about inflation. That's the kind of factor that happens in the world around you. But one of your pieces of advice about dealing with that kind of a global trend, a country trend is don't over tilt on it. Don't react too quickly, have a longterm.

View, it sounds like part of what you're seeing here with this kind of portfolio allocation thinking is maybe don't over jump too quickly as world events happen, but pay closer attention to your own life events, your own life situation, and be ready on a six or 12 month basis  to ratchet around that. 

Mike: [00:15:35] oh, absolutely. A hundred percent. It's all about your situation. Sure. There's global events going on all the time and they affect your portfolio and in your investments, But not massively in the sense that if it's a dollar for 10 years from now and it drops by 20 or 30%, it doesn't matter. I know it's hard to think that, like what, Mike, what are you talking about?

 I just lost money. 

Matt: [00:15:58] easy for you to say. 

Mike: [00:15:59] easy for me to say you didn't lose money. You didn't lose any money. Okay. It's the dollar you're going to spend in 10 years from now.  Hopefully it comes back. All right. And many ten-year periods, it comes back. All right. Majority of them, it comes back, but you haven't lost any money.

All right. And so  you definitely have to apply it to your personal situation when you need money. When you're going to spend the money,

Matt: [00:16:23] and I know we've done a full show on how to fund which accounts and in what order, by the way, really excellent show. Where can people find that in terms of , if you want to listen to it as a podcast or find the same material 

Mike: [00:16:38] Yeah, I have a podcast. It is financial planning for entrepreneurs and tech professionals. And you can find all a great content there.

Matt: [00:16:46] .  You can find a lot of this material of course, on your website, but just as an overview, I assume that it  matters once you've done this top level analysis of how much cash you're going to need in what timeframe you're not done.

You do have to actually put your investments into different accounts. Does it matter? I assume the answer is yes.  How you make those decisions?

Mike: [00:17:09] to switch it up on you. I'm going to say yes, it matters. But no, if you do this process is maybe 70, 80% of the game. In fact, saving is 70 to 80% of the game. So that's a part of this plan is like, what am I going to need dollars? How am I going to invest them? But you also implicit in this is you're making income to cover your current expenses.

And you're trying to figure out, when I'm going to need those dollars, if you can save money each year, That's the number one factor. All right. By a lot, because if you're not saving, then nothing else matters. So the first thing is you have to save. And at that point you really went in the game. If you can set up a job and auto invest in a 401k and even if , everything else is in the checking account, that's great.

And then, once a year or so you do this exercise, oh, these dollars are for the future. I should get them invested. Then yeah. If you could open a brokerage account and get them invested. Now, if you could do all those other things, HSAs and IRAs and all these different account types, that's even better, you're going to be saving massively in your taxes.

So absolutely you can save lots of dollars by making smart choices, but first things first, man, save and have a good a well-diversified portfolio.

Matt: [00:18:23] that is really stellar advice. I never thought about that way in so much financial planning advice that you read or listen to, or, go over with your own financial planner does come down to those higher level decisions of which account and  the tax consequences. And look, we certainly cover.

A lot of that kind of stuff. That's as you said, there, there are thousands of dollars, especially when compounded over decades on the line here by all means get that right. But that's such an interesting idea that, Hey, look, if you do absolutely nothing else, you can feel pretty good about yourself.

If you just do this process, I know this is working against your. Your line of business, but is this initial planning process of just making sure that you're saving the right amount, regardless of what type of account you're saving it in? Is this the kind of thing that people really could do on their own if they have no time for absolutely 

Mike: [00:19:19] Yeah, absolutely.  We just laid it out. How to do it, get out a piece of paper, spend 30 minutes, write it down and then it is important. I will say this. It is important to get the money invested so that the dollars that are for seven to 10 years out, I run  across a lot of people that have built up cash.

They've been saving. Okay. But now they have a large section of cash and they're like, I know I need to get this invested. So what I do recommend is once you've done the exercise, the fixed income, if you just have cash and bonds needs for the next seven years, you could just literally keep that in cash.

That would be fine. But things that you do want seven plus years those dollars really get those invested into the market. You could set up automatic ways of doing that, do it at a brokerage, startup IRA, your individual retirement accounts, HSA accounts, all these other things, great types, but even just the brokerage Vanguard, you could use Robin hood, but it in, a stock fund, just get a well-diversified yeah.

Fond and get it into the market so that it's going to compound and grow for you.

Matt: [00:20:10] You can do it through a brokerage, you could do it online yourself. You could do it through your bank, who could give you.

Some pretty easy off the shelf investment options. All right, Mike Morton, that was a really good piece of practical advice for personal financial planning. Mike Morton of Morton financial advice.

Thanks so much. 

Mike: [00:20:28] my pleasure. 

Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at financialplanningpod@gmail.com. Until next time thanks for tuning in.