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Is the 60/40 Investing Approach Obsolete?

By Rachel Warren, Travis Hoium, and Connor Allen – Dec 17, 2021 at 8:15PM

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The mix of stocks and bonds in your portfolio matters.

While long-term investing is the most effective means of building and sustaining wealth via the stock market, there are a variety of ways that investors can apply this strategy to their personal portfolio.

One popular method is the 60/40 approach, which involves allocating your portfolio to 60% in stocks and 40% in bonds. In this segment of Backstage Pass, recorded on Nov. 17, Fool contributors Rachel Warren, Travis Hoium, and Connor Allen discuss whether this approach can still work in today's market environment as well as some stocks that investors should consider to help fight inflation. 

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Rachel Warren: Barron's recently released a report saying that the classic investment approach of the 60/40 portfolio, 60% stocks, 40% bonds, they're saying that formula is no more. It's dead. According to the article, "sky high stock prices, rock-bottom interest rates, and an increasing tendency for the two asset classes to move in lockstep has prompted most advisors to ditch the formula". Barron's also reported that financial advisors are shifting away from the 60/40 approach in a variety of ways.

One of which is encouraging clients to just invest more heavily in publicly traded equities, as well as exchange-traded funds and shifting away from such a high concentration of bond investing.

My question is this, we talk a lot about asset allocation over here at the Motley Fool, including the 60/40 rule, and even more importantly, the value of diversifying your portfolio in quality stocks across a wide range of industries and sectors and holding them for many years. I'm curious what both you guys think about the 60/40 rule.

How has your investing strategy changed with time? In today's high-inflation environment, have you implemented any changes to your stock buying approach? Take this one first, Travis.

Travis Hoium: I have not implemented anything like 60/40. I'm 100% invested in stocks. I think the way that I look at managing my portfolio and as I help my family members do the same is thinking about the risk profile of different pieces of your portfolio.

When I buy a stock like Apple, I look at that very differently than buying a stock like Nvidia. Same thing with a company like Verizon. I'm not necessarily expecting a lot of price appreciation from Verizon, but you get a great dividend yield. Another example of that would be NextEra Energy Partners. You're buying a dividend yields, you're buying assets that produce energy for 20, 30, 40 years.

It's a lot like buying a bond, but you get some of those aspects of equities as part of that. That's the way that I look at it in sort of being comfortable with what the risk profile of the entire portfolio looks like. You asked about in a picturing and inflationary environment. As inflation has become a piece of our discussions in the market, more and more. I've been thinking about who is really going to benefit and one company that keeps popping up to me is MGM Resorts.

If you look at Las Vegas is just booming right now, they're reporting record revenue on a monthly basis from a gambling side. They're still not quite back from a room revenue side because big parties and events aren't back yet. But if we see inflation, we're going to see hotel rates go up. We're going to see people looking at a $100 chip, maybe like they used to look at a $50 chip.

There may be going to be gambling a little bit more and the expense to build those casinos was put into the ground, in some cases decades ago. The upside for them is really going to be tremendous. It's really an operating leverage play. That's a kind of company that in an inflationary environment, I think there could be tailwinds for them. That's one to keep an eye on.

Connor Allen Yeah. Travis, I love the part where you talk about having a risk profile for different stocks in your portfolio. I know a lot of companies that you can invest in to get that bond-like return are ones like Southern Company that have contracts for 30, 40, even 50 years.

That revenue is not going anywhere. It's very safe. It's not a high-growth company, but it's something that could act like a bond in your portfolio, and so I like that approach. That being said, I'm also 100% in stocks and always have been. I've never even touched a bond. 

I'm not the best person to ask on this, but I don't think that the 60/40 portfolio is dead. But I do think that if that's the way that you invest, I don't think it's time to jump ship. I think that it is a great approach and has worked for decades on end.

As equity prices go down, take money out of bonds and put them into equity and as bond prices go down, do the flip. I think that if that's the way that you invest, do it and stick with it.

Connor Allen owns Apple and Nvidia. Rachel Warren owns Apple. Travis Hoium owns Apple, MGM Resorts International, NextEra Energy Partners, and Verizon Communications. The Motley Fool owns and recommends Apple and Nvidia. The Motley Fool recommends Verizon Communications and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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