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Why the 60/40 Portfolio is Obsolete—Smarter Investment Strategies for Today
For decades, financial advisors have touted the 60/40 portfolio—60% stocks and 40% bonds—as the gold standard for investment allocation. This strategy, rooted in Modern Portfolio Theory introduced by economist Harry Markowitz in the 1950s, was designed to balance risk and return. Millions of investors have followed it blindly.
Fast forward to the 1990s, financial planner Bill Bengen introduced the “4% rule,” a guideline suggesting retirees could safely withdraw 4% of their portfolio annually without running out of money over 30 years. He based this rule on historical data, analyzing the worst economic periods to ensure a conservative approach.
Another conventional principle, the “Rule of 100,” states that investors should subtract their age from 100 to determine how much of their portfolio should be in stocks, with the remainder in bonds.
But here’s the reality: These outdated strategies don’t account for today’s evolving financial landscape. Let’s explore a modern approach that challenges traditional thinking and offers better returns.
The U-Shaped Investment Strategy
Renowned financial expert Paula Pant recently interviewed Bill Bengen, who now suggests a 5% withdrawal rate is sustainable—higher than the once-rigid 4% rule. His reasoning? The original 4% rule was designed for worst-case scenarios.
A more dynamic strategy involves reducing stock exposure at the beginning of retirement, holding cash or bonds temporarily, and reinvesting in equities after a few years. This mitigates the “sequence of returns risk,” which is when early-retirement market downturns force retirees to withdraw from their portfolios too soon, permanently damaging their long-term wealth.
By adjusting investments throughout retirement, rather than sticking to rigid percentages, retirees can safely withdraw more money while maintaining financial stability.
Study: 100% Stock Portfolios Outperform 60/40
Recent research by finance professor Aizhan Anarkulova and colleagues revealed that portfolios with 100% stock exposure significantly outperformed traditional 60/40 allocations and target-date funds (TDFs).
Their analysis incorporated global stock diversification rather than relying solely on U.S. markets. Surprisingly, their “optimal portfolio”—a mix of 33% U.S. stocks and 67% international stocks—not only produced 50% more wealth than 60/40 portfolios but also had a lower failure rate.
This evidence further dismantles the myth that bonds are necessary for portfolio stability.
My Investment Strategy: Stocks + Real Estate
Instead of following the outdated 60/40 model, I allocate 50% of my investments to stocks and 50% to real estate—completely avoiding bonds.
My real estate investments include private debt funds, real estate syndications, and equity funds, offering returns without the hassle of property management. Unlike traditional real estate investing, I diversify across locations, asset classes, and time commitments through a co-investing club, allowing me to invest with as little as $5,000 per deal rather than the usual $50,000 minimum.
This approach spreads risk while maximizing returns, allowing me to build wealth more efficiently.
Why I Choose Real Estate Over Bonds
Bonds have underwhelming returns. The S&P 500 Bond Index has delivered a mere 2.36% average annual return over the past decade—lower than the 2.9% inflation rate. In other words, bond investors are losing purchasing power.
By contrast, my real estate investments typically target annual returns in the mid-teens. And contrary to the belief that higher returns mean higher risk, strategic real estate investing can provide both high returns and stability—especially in recession-resistant asset classes.
This is why I focus on risk-adjusted returns rather than blindly following conventional diversification rules.
An 8% Withdrawal Rate?
Imagine earning an 8% average yield from real estate investments and using a 5% withdrawal rate from stocks. A balanced 50/50 real estate-stock portfolio would allow for a 6.5% withdrawal rate—far higher than the traditional 4%.
With a 6.5% withdrawal rate, you’d only need about $615,000 to generate $40,000 in annual income, rather than the $1 million required under a 4% withdrawal model.
The bottom line? Conventional investment wisdom is outdated. A well-diversified strategy incorporating stocks and real estate—not bonds—can accelerate financial independence and improve long-term stability.
If you’re still relying on the 60/40 portfolio, it might be time to rethink your strategy.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Why the 60/40 Portfolio is Obsolete—Smarter Investment Strategies for Today
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“