Why The 60/40 Rule For Stocks & Bonds May Need Rethinking
For decades, investors have been told to stick to the 60/40 rule for bonds and stocks: keep 60 percent of your holdings in stocks and 40 percent in bonds. This general advice is designed to expose your portfolio to the potential gains you’d get from stock ownership, but with a certain amount of safety by way of holding bonds.
The markets have changed significantly over the years—especially with the advent of new financial products, alternative investments, and unprecedented investor access to the markets. Although the 60/40 rule may still be a decent strategy for diversifying your assets, it may not go far enough. That might mean you’re leaving gains on the table.
Here’s why the 60/40 rule is due for an overhaul and the best strategies for investors in the 21st century.
Breaking down the 60/40 rule
The origins of the 60/40 rule are somewhat ambiguous—a testament to how long this axiom has been in existence to be sure. The general premise is that most investors should put a majority of their holdings into stocks, with more stable products, such as bonds. Stocks offer a greater opportunity for a large return: the tradeoff being that you may also experience greater losses if things go sour with your holdings. Bonds, on the other hand, offer more stable—and smaller—returns, depending on who’s issuing them.
One of the essential investing questions is how much risk you should take on. The answer depends on several factors: your personal appetite for risk, your goals, and how quickly you want to see your assets grow. Investors who are risk averse will want a significant check against losing money through stocks, which bond holdings can provide.
People who have a “buy and hold mentality” with their portfolio, meaning they’re interested in long-term gains rather than short-term profit, may want to find the right mix of opportunity and safety as far as returns go. A 60-40 rule that has 60 percent of your assets in stocks (potentially bigger return with more risk of loss) and 40 percent in bonds (smaller return with less risk of loss) gets an investor pretty close to their long-term goal of making a return on their investments.
Why the 60/40 rule may not be right for you
The 60/40 rule makes a few assumptions that don’t fit today’s markets. The return on bonds is miniscule in our current economic landscape: interest rates are a fraction of a percent on average, and are hardly any better than a simple savings account or certificate of deposit. These conditions mean investors aren’t likely to see much upside to allocating 40 percent of their portfolio to bonds. Although bonds are certainly safer than stock ownership, there’s too little incentive for investors and too many competitors for other stable investments (such as farmland).
Pursuing a 60/40 portfolio is a one-size-fits-all approach for long-term investors. You’re likely to realize gains over the long haul, but you may also miss out on significantly better returns as a result. That’s fine for investors who don’t want to spend much time building a tailored portfolio, but it sacrifices profits for expediency. If you’re confident and willing to put a bit more legwork into your holdings, you can do better.
There are merely too many options for investors these days to follow such a cut-and-dry investment approach. The world of mutual funds, exchange-traded funds (ETFs), and alternative investments gives investors more choice in how they hedge against stock performance. Not accounting for these new options—as well as the shrinking dividend on bonds—can cost you in the long run.
Retooling the 60/40 rule for a new investing era
The 60/40 rule may not be as helpful for modern investors as it once was, but it’s not outmoded entirely. The general premise still holds: you should embrace investing risk, but not without protecting some portion of your assets.
These days, investors would be foolish not to look at the best way to implement this kind of strategy beyond the old 60/40 rule. Consider this investing rule as a philosophy rather than a hard-and-fast approach to your investments. Sixty percent of your portfolio could go into stock ownership and options trading (if you want to pursue short-term gains) with another 40 going to safer investment types.
Safer investments that still generate returns fall into a few categories. The first and most obvious is funds: mutual funds, index funds, ETFs, and the like. Bonds are still a place where investors can safely park assets, of course. Investors should consider alternative investments as well in today’s market, however. Alternatives, such as farmland investing, can serve as a unique alternative to a bond with much more upside potential.
Farmland investing provides you with a historically stable investment that offers terms once provided by high-grade bonds. The overall value of a square acre of farmland has appreciated by nearly 73% from 2006 to 2020. Meanwhile the return on a municipal bond has dropped from 4.8% to 2.7% in the same period. The sheer variety of farmland investment opportunities means you can right-size your investment based on the rate of return, length of investment, the kind of crop harvested, or geographic region. Bonds offer plenty of variance in terms of where to put your money as well, but for very little return in today’s market.
Why farmland investing might be a fit for your modern portfolio
The world of financial opportunities is much larger than it was even 10 or 20 years ago. Abiding by the 60/40 rule would be fine if there weren’t such an array of other holdings that you can incorporate into your portfolio. In other words, sophisticated investors can do better.
That’s where FarmTogether can help. Our platform makes it easy to invest in hand-selected farmland investment opportunities monitored by field-leading financial experts. You only need $10,000 to get started and can open your portfolio up to a variety of farmland and crop options.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.