Feb 232015
 

I recently had a client ask a question about the what the best overall asset allocation  might be. Of course the answer is – it depends. Obviously they did not find this to be a very satisfying answer.

However I came across an article written by Rick Ferri a few days ago, which discusses Peter Bernstein’s 60/40 Solution article written in the early 2000’s. Clearly a 60/40 equity/fixed asset mix won’t be right for everyone, but Bernstein’s research suggested based on his study is might be the “center of gravity”  or perhaps at least the right starting point for many long term investment situations based on overall risk and return.

The challenge is whether over time it is still in the ballpark as far as a general starting point. Of course, this is a different time, the current interest rate environment makes any allocation to fixed income a little challenging to accept – at least on the surface. It is unlikely to generate much current income and ultimately as interest rates move up a decline in value is almost assured. But, keep in mind that although we would like the fixed income portion to be a positive contributor to overall account performance, its more important role may be to balance the inherent volatility in the equity portion of the portfolio.

The other part of the asset allocation question depends on your personal situation: are you growing  your portfolio for retirement or are you drawing it down to create a retirement income or cash flow stream?

If you are building your portfolio, a stronger equity allocation and it more variable returns may let you more comfortably grow account with your periodic dollar cost averaging contributions.

If on the other hand, you are drawing a monthly ‘income’ from your retirement account, the impact of these periodic withdrawals specifically in a down equity market can potentially be a significant challenge to your overall retirement cash flow. In this situation, a more modest allocation to equity maybe the more prudent choice. This article compared the returns for a 60/40 portfolio and a 30/70 portfolio. My observation would be that in ‘most’ circumstances the 60/40 portfolio will generate better long term returns. However for a person in or near retirement a key consideration regarding a 30/70 portfolio is that it is much ‘less’ likely to exhibit negative returns albeit smaller returns.

Mr. Ferri’s article can be found at http://www.rickferri.com/blog/investments/the-center-of-gravity-for-retirees/ .

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