Your Complete Guide to Index Investing with Dan Bortolotti

Does a 60/40 Portfolio Still Make Sense?

2013-01-21T09:00:28+00:00January 21st, 2013|Categories: Behavioral Finance, Bonds|89 Comments

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.


  1. Bh January 22, 2013 at 11:03 pm

    Since all my accounts are tax advantaged I don’t think I have many tough decisions ahead…correct? Thank you for your fast response!

  2. sn January 23, 2013 at 5:19 am

    I have a question about my 70/30 portfolio. Two of my four etfs are enrolled in DRIP while the other two are not eligible for DRIP. Should I put that into consideration when I rebalance it annually?

  3. ApplePi January 23, 2013 at 2:52 pm

    I too decided to do a 70/30 allocation, with a higher amount in REITs. We’ll see how it pans out, but I’m okay taking on a little more risk and using dips in the market to buy what’s lower. In fact, it’s one of the strategies in CCP’s book.

  4. Canadian Couch Potato January 23, 2013 at 4:32 pm

    @ApplePi: For the record, I should clarify that “using dips in the market to my what’s lower” is not what I recommend in the book: I simply advocate normal rebalancing when your target allocation is out of whack. Just want to make it clear I’m not advocating any kind of market timing.

  5. Canadian Couch Potato January 23, 2013 at 4:39 pm

    @sn: A DRIP is not likely to make much difference over the course of a year. So when it’s time to rebalance, just look at the current market value of each ETF and determine whether it is off target, and then adjust accordingly.

  6. patrick s January 23, 2013 at 9:54 pm

    I have a portfolio of evenly divided of the following:
    -cdn equity
    -us equity
    -international equity
    -gold fund

    I have gone with the asset allocator approach.
    Have different asset class with little or no corellation.
    Minimize portfolio volatility whilr maximaxing compound returns.

  7. Mark January 23, 2013 at 10:46 pm


    Interesting that you have a gold fund. A little risky for me. I would rather go with REITs but that is just me.

  8. Investing Blog Roundup: What Happens to Spending Over Time? January 25, 2013 at 8:00 am

    […] Does a 60/40 Portfolio Still Make Sense? from Canadian Couch Potato […]

  9. Trevor C January 25, 2013 at 1:53 pm

    I’ve just laid out my investments using the CCP Rebalancing Spreadsheet, and I noticed REITs are included in “other income.”

    This makes sense to me. But elsewhere, and I think on this site as well, REIT ETFs have been referred to as “equities.”

    So the question is, when I’m looking to allocate percentages of my account to income/equity, where do I place REITS? If I have 30% in bonds, 10% in REITS, and 60% in Equities, does that mean I have a 60/40 split, or a 70/30 split?


  10. patrick s January 25, 2013 at 2:26 pm


    Actually i meant to say a gold bullion fund
    Although not sure if that entails the same risk

  11. Canadian Couch Potato January 25, 2013 at 2:31 pm

    @Trevor: REITs are generally considered equities, but they have a unique structure that makes them different from corporations. When they pass their rental income along to shareholders they avoid paying corporate taxes, so that income is fully taxed in the shareholders hands. Corporations that pay dividends have already paid tax on their earnings, so shareholders can claim a tax credit to avoid double-taxation.

    REIT distributions may actually be a combination of “other income,” return of capital, and dividends, which makes them difficult to track in a non-registered account.

  12. rob January 25, 2013 at 10:47 pm

    Investors complain because yields are low, but that is because inflation is low! In the ‘good old days’ when we had 15 percent inflation everyone was happy when they got a 10% return on bonds. Now when inflation is 1% people whine when they get a 3% return from bonds. I would rather have the latter than the former. I think the 60/40 equity bond split is fine. Investors have to start thinking of what they are getting net after inflation.

  13. […] Does a 60/40 portfolio still make sense? – Canadian Couch Potato […]

  14. […] Does a 60/40 portfolio still make sense? – Canadian Couch Potato […]

  15. Martin January 26, 2013 at 10:49 am

    Rob, the issue I have with your line of thinking is that the official inflation rate tells you what happened over the past year or multiple years, and what you lock into when buying a bond (or a bond fund/ETF) is a future yield. And it seems to me that the future pretty much never works out to what was expected.
    I don’t even think that the Bank of Canada or the Federal Reserve have that much control over inflation rates. When almost everything you buy has a ‘Made in China’ sticker on it, I think that is where our inflation will come from. I don’t think anybody has any clue when or how large it will be, the Chinese central bank is walking a tight line. The central bank is keeping the value of the Chinese currency artificially low to stimulate export and employment, but if or when they decide that raising the standard of living should be their priority, they can easily let their currency appreciate and we have very little that we could do about it. Prices for everything Chinese will rise quickly, just as happened to Japanese goods in the 70’s and 80’s, and Japan back then was a tiny speck of an economy compared to the Chinese today.

  16. mark January 26, 2013 at 12:42 pm

    What about splitting the fixed income portion of the portfolio with preferreds

    For example

    CPD -20%

    The CPD acts like bonds but have a higher yield? I don’t know why all the CP model portfolio’s don’t include this??


  17. Canadian Couch Potato January 26, 2013 at 12:57 pm

    @mark: “CPD acts like bonds but have a higher yield.” That’s a huge oversimplification: preferred shares and bonds have some risk factors in common (notably interest rate risk) but there are many other factors to consider as well.

  18. Mark January 26, 2013 at 3:43 pm

    Thanks for the response, so would you consider it a mistake to take this approach with the CP and split the fixed income by combining preferreds/bonds togeather for the income asset class

    60% equity
    20/20 bonds and CPD(preferreds)



  19. Canadian Couch Potato January 26, 2013 at 3:55 pm

    @Mark: It’s not something I would recommend. I think you can make an argument for some allocation to pref shares in a non-registered account, but I would not simply carve off half the fixed income allocation and put it into this asset class.

  20. jeff long January 28, 2013 at 8:11 am

    I have 90% Dividend paying stocks paying about 4.5%. I can live very well on the dividends. Let say the market corrects by 35% and the dividends get cut by 20% and it lasts for 4 or 5 yrs. I would have to adjust my lifestyle somewhat but Icould still live very comfortably.

  21. Reggie January 29, 2013 at 6:33 pm

    ” …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.”

    Well said! Agree.

  22. Brodie January 30, 2013 at 1:45 pm

    Hi Dan and fellow spuds,
    I just opened an RESP for my newborn son at TD. They did their routine questionare to see what type of allocation I was suited for and the pie chart displayed a 20% fixed income and 80% equities allocation. I’m very tempted to start shifting my E-Series retirement portfolio towards this allocation as I feel I will be comfortable with the subsequent volatility. My hesitation lies in the fact that the bond portion of my portfolio is the only fund in the red. If it was on par with or out performing the other funds I probably wouldn’t be shifting the allocation. Am I in breach of couch potato etiquette?

  23. Mark January 30, 2013 at 6:37 pm

    Yes, definitely. You would be selling low and buying high. The whole idea of having a bond potion to your portfolio is to manage the volatility since bonds and stocks have a negative correlation. Your bond funds should be in the red right now as we are in a bull section of the market where stocks are surging. When we move into a bearish market or a market crash, your bonds will increase in price which help to counteract the decrease in value in stocks. This is when you sell your bonds and then move some of it over to buy the cheap stocks. Thus, you will be selling high and buying low. This is vital that you understand this, otherwise you will lose the whole point of passive investing.

    Just an observation, if you are already not comfortable with seeing a small portion of your funds in the red, are you sure you will be comfortable with a 80/20 mix? Because when the market crashes (which it will), you will see a lot more red and you want to be sure that you have some fixed income/bonds to reallocate and balance your portfolio.

  24. Canadian Couch Potato January 31, 2013 at 12:03 am

    @Brodie: Unless interest rates move lower, it’s likely that all newly purchased bond funds will appear to be “in the red” for a while, but this is deceptive. Almost all bonds sell at a premium these days, which means they will suffer capital losses when they mature, but this will be offset by higher interest payments. To give a simplified example, after one year a bond fund might show a 2% drop in value, but over the year it may have paid a 5% yield, so your total return on the year is +3%, even though the fund will appear to have lost value.

    Bottom line, build your portfolio with your desired allocation and ignore what may have happened in the past. This article may help:

  25. […] Does a 60/40 Portfolio Still Make Sense? […]

  26. Harry March 2, 2013 at 11:54 pm

    The bond allocation in the Couch Potato portfolios are all longer duration. With the chance of rising interest rates would shorter duration bonds see less devaluation? I am refering specifically to I shares CLF 1 to 5 year laddered government bonds and CBO 1 to 5 year investment grade corporate bonds.

  27. Canadian Couch Potato March 3, 2013 at 3:11 pm

    @Harry: If rates rise, then yes, short-term bonds would fall less in value. But the tradeoff is short-term bonds have lower yields. Nothing wrong with CLF and CBO, but for long-term investors I feel it makes more sense to use a broad-based fund that holds all maturities.

  28. Chris M March 14, 2013 at 9:18 pm

    I’m getting ready to start my portfolio but almost everyday I hear “experts” say that “only a fool would buy bonds right now. There is ZERO upside and only downside as interest rates rise.”

    Under a rising interest rate scenario would it be better to buy laddered GIC’s or Bonds? I would expect that as interest rates rise Bond yields would also need to rise but I’m having trouble wrapping my head around this issue.

  29. Oldie March 15, 2013 at 12:21 am

    @Chris M: The answer to your question depends a lot on whether your proposed GIC/Bonds will be in an RRSP, which is where I would expect someone “getting ready to start” would position his portfolio. If it is to be in a taxable account, an exhaustive exposition and discussion concerning many aspects of those choices was presented in the first CCP post of this month (March 6).

  30. Chris M March 15, 2013 at 8:35 am

    @Oldie: I’m just getting started with passive investing. I’ve got about $400k cash sitting in RRSP’s and a LIRA. Again this morning 2 respected investors on CNBC said the 30 yr Bull market for bonds is done. Why would anyone invest in Bonds at the beginning of an “almost” certain Bearish bond market? Isn’t that like buying at the top? I understand the importance of bonds in normal conditions (This isn’t normal with such low interest rates) but if we are going to be in a 10-20 year bear market for bonds this strategy doesn’t make any sense to me at all given my retirement horizon (25 years). I think that the idea of passive investing is great but I’m really struggling with the idea of looking at all of history and saying over the last 100 years X has performed at 8%. Doesn’t averaging and simplification fail to realize that cycles can be beyond an investors time horizon?

  31. Canadian Couch Potato March 15, 2013 at 9:11 am

    @Chris M: I disagree with Oldie here: I don’t think your questions have anything to do with whether you’re using an RRSP or non-registered account. There are much bigger issues to consider.

    I have written a lot about the “bond bears” and I’ve copied some links below. To summarize the most important points, it’s certainly true that the bond returns of the last 30 years cannot be repeated in the foreseeable future. This is not a forecast: it’s just math. Expectations for bonds have to be much lower than their historical averages (which are about 5% or 6%). But to say that “we are going to be in a 10-20 bear market for bonds” is a giant leap. We simply don’t know when interest rates will rise, nor by how much. Don’t lose sight of the fact that the CNBC gurus have been singing the same song since 2009 and they have so far been spectacularly wrong.

    There will almost surely be years when bonds deliver negative returns, but always remember that when rates rise, that means new bonds are issued with higher coupons. If you are adding money to a bond portfolio every year, rising rates are not all bad. I like to remind people that it’s odd to complain about low interest rates and also complain that they are likely to go up.

    Your last comment about cycles being beyond an investor’s time horizon is very important. If you are 25 years away from needing your retirement savings, you probably shouldn’t be buying 30-year bonds. But a broad-market bond fund has an average maturity of about 10 years, and a duration of less than seven years. That means that an investment in this fund will not lose capital over any period longer than seven years, regardless of where interest rates move. (More about this in the articles below.)

    If in the end you decide to use GICs instead of bonds, there’s nothing wrong with that, but make sure you do it for the right reasons.

  32. Oldie March 15, 2013 at 12:28 pm

    @CCP,@Chris M: Sorry, I phrased this badly: What I meant was that in a taxable account, the answer to the limited question “GIC or Bond”, as dealt with by the referenced post, for most tax situations, was GICs because of better tax treatment. By not immediately filling in a reply for the “if in an RRSP” scenario, and not addressing the “in a rising interest rate scenario”, I inadvertently gave the impression that this was the only consideration to consider; I am relieved you jumped in there — these are truly huge issues that touch at the very essence of the Passive Investment principle, and few can match your authority in refuting interest related market timing predictions and your clarity in using basic couch potato reality to buttress this refutation.

  33. Chris M March 15, 2013 at 9:30 pm

    Thank you very much for taking the time to answer my questions. This is a great site!

  34. Andrew March 16, 2013 at 9:35 am

    My rule of thumb during my saving years was to assume only the risk free return from the portfolio, despite an allocation to equities, and to regard any return beyond this as a bonus. This lower assumed return caused me to try to save more through one easy technique – I set up an automatic withdrawal deposited to a high interest savings account and this HISA was linked to a systematic investment plan using mutual funds (buying a set amount each month toward my asset allocation – these were the days before I used ETFs). I never saw the money so I didn’t miss it and got used to living on the residual.

  35. Dale@Streetwise March 16, 2013 at 6:18 pm

    The last time were in this situation with low and rising rates in 1950-1964, the classic balanced portfolio (using U.S. indexes) delivered a 600% return. The 60-40 is always in season. Always best not to guess.

  36. bettrave March 27, 2013 at 11:54 am

    In this long time ago period 1950-1964, was the indexes in all-time high or near it?

  37. Risk tolerance as I age – Finance & Money &Loans & Mortgage November 15, 2015 at 9:58 pm

    […] Couch Potato has another article, Does a 60/40 Portfolio Still Make Sense? A 60/40 portfolio is a fairly common split for regular investors. Typically considered not too […]

  38. nick August 26, 2016 at 4:07 pm

    My portfolio looks like this for long term



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