Home Adviser Fund Update The Enduring Upside of the 60/40 Approach Published August 19, 2020 Table of Contents The Enduring Upside of the 60/40 Approach Last Chance to Roll Over 2020 RMDs Special Podcast: Defending Against Recency Bias Vanguard Rethinks Management for the Energy Fund The Enduring Upside of the 60/40 Approach Keeping a “balanced” portfolio—60% stocks, 40% bonds—is one of the investing world’s most tried and true strategies for dealing with risk. But has this classic approach finally lost its luster? Given the ultra-low-yield environment of the current bond market, 60/40 has attracted some detractors. (Including big names like Burton Malkiel, author of A Random Walk Down Wall Street.) While we don’t side with the 60/40 naysayers, their argument is worth a nod: With the Federal Reserve dropping its interest rate target to near-zero in response to the pandemic, government bond yields have cratered across the board (yields on the 10-year Treasury haven’t been above 1% since March and they hover at 0.71% as of this writing). And they may continue to bump along this rocky bottom for the foreseeable future. The last time the Fed went to zero, in the wake of the 2008 Financial Crisis, it didn’t raise rates again until 2015. With yields this low, bonds can’t possibly provide the returns as they once did, and so allocating 40% of your portfolio to them simply doesn’t make sense, critics say. That argument has two major flaws: It ignores the role dividends can play in producing income, and it forgets that the most important reason to invest in bonds isn’t to produce income, but to aid in risk protection. At Adviser Investments, we think there’s still a lot to like about 60/40—even when yields are hitting all-time lows. While bonds have historically been prized for their income-producing abilities, the ability of some stocks to generate a sustainable income stream through dividends is similarly attractive. Unlike bond yields, dividends tend to grow over time, helping to counter inflation. Indeed, in the low-interest rate bull market we’ve experienced in recent decades, stocks have generated more income than bonds. If that’s the case, why not simply invest 100% of your portfolio in equities? One word: Risk. Many investors simply can’t stomach the prospect of seeing 25% of their portfolio’s value go up in smoke in a matter of weeks, as happened this past March. For investors seeking risk mitigation and downside protection, a traditionally balanced portfolio can still be compelling. As we often say, how much is an extra percent or two of returns really worth if you can’t sleep at night? And that’s a crucial point that many 60/40 critics overlook. They recommend replacing the bonds in your portfolio with alternative income-producing asset classes, like preferred stocks and real estate. But the reason those alternatives offer higher yields than investment-grade bonds is that, historically, they’ve also offered higher risks. Take real estate—the COVID-19 pandemic hasn’t merely affected bond yields, it’s also transforming the demand for retail and office space, sending some REITs reeling while others have prospered. The final mistake 60/40 doubters make is disregarding the long history and storied staying power of the strategy. Balancing a portfolio with 60% of your assets in stocks and 40% in bonds is the “classic” approach, not because it has performed well recently, but because it has endured over time. The table below presents the historical performance of a balanced portfolio, comparing returns for the S&P 500, 10-year Treasury bonds, and a 60/40 blend of the two, back to the stock index’s 1957 inception. (We use both decade-by-decade annualized returns and stats on rolling 10-year periods for additional context. The 60/40 portfolio was rebalanced monthly; S&P returns in the 1960s do not include dividends.) Source: Morningstar, S&P Dow Jones Indices, Adviser Investments. Not every decade has been a winner. But what is clear is that when you look through a wider lens—factoring in periods with bear markets and bull markets, high inflation and low, recessions and booms—the blended portfolio provided a 10-year annualized return of nearly 9%. Can we guarantee that the 2020s will deliver a 9% return? No. But we can say that historically, a balanced portfolio can allow you to participate in the stock market’s gain without taking on nearly as much risk. Last Chance to Roll Over 2020 RMDs Required minimum distributions, often referred to as RMDs, are the amounts that U.S. tax law requires retirees to withdraw annually from traditional IRAs and employer-sponsored retirement plans. For 2020, Congress and the IRS took the “R” out of RMDs, waiving the required minimum distributions or allowing individuals to roll them over back into their retirement account if they’ve already withdrawn them. The RMD relief measure is part of the $2-trillion CARES Act passed by Congress in March to help provide aid for the coronavirus. The deadline to deposit any funds you’d like to roll over is August 31, so time is running short to take advantage. We’ve written before about how the waivers and rollovers will work, so consider this a friendly reminder. Please contact your wealth management team if you have any questions about how to handle the transaction. Podcast: Investment Trends Are Fleeting—Defending Against Recency Bias Amid a global pandemic, tech stocks are off to the races, interest rates are in the basement and gold is fashionable again. Are these market developments going to last? And if so, how can you take advantage? Join Chairman Dan Wiener and Director of Research Jeff DeMaso for an insightful look at the dangers of recency bias—peoples’ tendency to expect the future to look like the recent past—and how disciplined investors can defend against this all-too-human impulse. In this informative conversation, Dan and Jeff discuss: Is the 10-year Treasury still a benchmark economic barometer? What’s the argument for investing in gold? And why you might want to think twice before going all in The potential impact of a vaccine on sectors hard-hit by the pandemic …and much more Investment trends can seem like no-brainers…until they’re not. How can you identify opportunities, guard against biases and defend against shifting tides? It’s never too soon to be a more informed investor. Click here to listen now! Vanguard Rethinks Management for the Energy Fund Vanguard is removing its own quant team from its Energy Fund. The Energy Fund had been run by Wellington Management since its 1984 founding. In 2005, Vanguard handed over a portion of the fund’s $4.55 billion to the Vanguard Quantitative Equity Group; at last report, the internal team oversaw about 5% of the fund’s assets. Now Wellington will resume management of the entire fund. The change will raise expenses by about one basis point. Vanguard will also be changing the fund’s benchmark to a mix of energy and utilities indexes to reflect the fund’s focus not just on oil and gas production but also energy production in the broader sense. About Adviser Investments Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. Disclaimer: This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Our statements and opinions are subject to change at any time, without notice and should be considered only as part of a diversified portfolio. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. You may request a free copy of the firm’s Form ADV Part 2A, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs. RIA Channel® Top 100 Wealth Managers ranks wealth managers “based on a proprietary set of criteria and data. The ranking is based on both size and growth in assets as of June 30, 2020, as reported to the SEC. RIA Database (RIADatabase.com) was used for regulatory data, organic research, and advisor surveys.” (See https://www.riachannel.com/2020-top-100-wealth-manager-list-methodology/.) Adviser Investments did not verify any data—nor were we asked to—prior to ranking or publication. Regulatory Assets Under Management (“RAUM”) displayed on RIA Channel’s website is calculated by RIA Channel, not Adviser Investments. We did not independently calculate our RAUM as of June 30, 2020, nor do we know RIA Channel’s RAUM calculation methodology. RIA Channel has not published information on how many firms were considered for ranking, nor did it publish criteria used for inclusion for consideration on this ranking. Adviser Investments did not submit any information to RIA Channel regarding in this ranking, request to be considered for the ranking or pay any fee in connection with this recognition. For more information and a complete list of recipients and rankings, visit https://www.riachannel.com/top-100-wealth-manager-list-2020/. The Boston Business Journal’s “Largest Investment Advisers in Massachusetts” ranking is based on each participating firms’ assets under management as of June 1, 2020. Only firms that choose to participate are ranked and included on the top 25 list. The award sponsor has not disclosed how many firms were survey or considered for this recognition, nor the percentage of total participants that ultimately received recognition. Award is not indicative of future investment performance nor represents client experience. For more information and a complete list of recipients, visit https://www.bizjournals.com/boston/subscriber-only/2020/07/16/largest-independent-investment-advisers.html. The Barron’s Top 100 Independent Wealth Advisors rankings consider factors such as assets under management, revenue produced for the firm, and quality of practice as determined by Barron’s editors. The award sponsor has not disclosed how many firms were surveyed or considered for this recognition, nor the percentage of total participants that ultimately received recognition. For more information and a complete list of recipients visit https://www.barrons.com/articles/are-ria-firms-growing-too-fast-the-story-behind-the-trend-51568420132. Years Received: 2019, 2018, 2017, 2016, 2015 & 2014. The Barron’s Top Advisor Rankings by State (Massachusetts) (also referred to as Barron’s Top 1,200 Financial Advisers) considers factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. According to Barron’s, “around 4,000” advisory firms were considered for this recognition in 2020; with about 1,200 firms receiving recognition. For more information and a complete list of recipients visit https://www.barrons.com/report/top-financial-advisors/1000/2020?mod=article_inline. Years Received: 2020, 2019, 2018, 2017, 2016, 2015 & 2014 The Financial Times 300 Top Registered Investment Advisers is an independent listing produced annually by the Financial Times and Ignites Research. According to the Financial Times, in 2019, approximately 2000 firms were invited to be considered for its list; 740 responded with 300 being named to this list. The listing reflects each practice’s performance in six primary areas: Assets under management (70-75% of a firm’s score), asset growth (15% of a firm’s score), years in existence, compliance record, credentials and online accessibility. For more information and a complete list of recipients visit https://www.ft.com/content/44d2b2b2-6cef-11e9-9ff9-8c855179f1c4. Years Received: 2019, 2018, 2016, 2015 & 2014. Awards referenced above do not consider client experience and are not indicative of such. Nor are awards indicative of future performance. Unless otherwise noted, Adviser Investments does not pay a fee to participate in any of these awards. Additionally, awards typically only consider and recognize participants that choose to participate; and are often based on information supplied by the participants—such information should not be assumed to be verified by the sponsor of the award. The Adviser You Can Talk To Podcast is a trademark of Adviser Investments, LLC. Registration pending. © 2020 Adviser Investments, LLC. All Rights Reserved.