For as long as I can remember, the traditional balanced portfolio has been 60% equities and 40% bonds. Indeed, all of my own model portfolios use that overall asset mix as a starting point. But a lot of industry folks are arguing that a 60/40 blend no longer makes sense.

In a recent article from the Associated Press, one fund manager put it this way: “One reason I’m skeptical about 60/40 is that it’s probably not aggressive enough, at least for a 40-year-old investor. You need to invest more in assets that are riskier than bonds if you want to meet your investment goals without having to save an extremely large percentage of your income.”

Historically, there’s no question this allocation served investors well. According to Vanguard, a portfolio of 60% stocks and 40% bonds would have returned 8.6% annualized from 1926 through 2011. Even if you subtract a full percentage point for costs, that rate of return would have been adequate to meet any reasonable retirement goal.

But that figure is based on an 86-year period where bond returns averaged 5.6%. In Canada, a diversified bond portfolio returned over 9% annually during the last 30 years as interest rates trended steadily downward, causing bonds to rise in value. But today, a fund tracking the DEX Universe Bond Index yields about 2.3% before fees. And while no one knows where interest rates are headed, it is mathematically impossible for bonds to continue the same price appreciation they enjoyed over the last three decades.

So where does that leave our 60/40 investor? With such a large allocation to low-yielding bonds, expecting anything close to 8.6% annual returns is clearly unrealistic: I would run screaming from any financial planner who made projections like that. However, I’m concerned when people tell investors they “need to invest more in assets that are riskier.”

Make the right adjustments

If you can’t expect bonds to deliver more than 2% or 3% for the foreseeable future, you need to make some adjustments. The problem is, telling people they need to adjust their risk tolerance is a non-starter. The expected returns of stocks and bonds change over time, but the human aversion to losses does not.

The fund manager in the AP article says with a higher allocation to equities “you’ll have a much better chance to achieve your retirement savings goals than you would with just 60 percent.” But that’s only true if the investor sticks to the plan—and an allocation of 70% or 80% equities is well outside most people’s comfort zone. Most people have a difficult enough time dealing with the volatility of a 60/40 portfolio.

Using Larry Swedroe’s rule of thumb, a portfolio with 70% equities can be expected to lose about 30% during a major downturn. With 80% equities, you should be prepared for a 35% loss. Most investors simply don’t have the stomach to lose a third of their life savings during a bear market, and today’s low yields on bonds and GICs don’t change this fact.

The solution, then, is not to discard the 60/40 portfolio and tell people they need to take more risk. A more prudent solution is to accept that most of us will need to save more money than our parents did. Or we’ll need to work a few years longer, or spend less in retirement. Nobody is jumping for joy about those options, but they are more realistic than the alternatives.