The 60/40 Portfolio Is Dead
Here’s how advisors are replacing it.
Here’s how advisors are replacing it.
Thanks for the memories, 60/40. A mix of 60% stocks and 40% bonds, or something close to it, could for decades be expected to produce enough stable growth and steady income to meet retirement goals. But 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. What are they doing instead? That’s the topic of this Big Q, our weekly feature where we ask advisors to weigh in on important questions.
Brenna Saunders, partner and wealth planner, Creative Planning: With longer and longer life expectancies, the typical retiree depends on their portfolio to meet their needs for decades, so we’ve never believed that large bond allocations are appropriate for them.We typically recommend having enough invested in bonds to get through a prolonged bear market and invest what remains in investments with a higher upside than bonds.
For most clients, the assets that would typically be invested in bonds under the 60/40 formula are directed to publicly traded equities instead. While stocks are inherently more risky than bonds in the short run, there is a long-run risk that a client outlives a portfolio that is positioned too conservatively in a low-interest-rate environment. When you add in the impact of inflation, a 60/40 portfolio may actually be less likely to achieve their goals. On paper, the portfolio may appear to be further out on the risk spectrum, but in reality is positioned appropriately when considering all of the risks to a client’s financial independence. For some clients, adding the private equivalent of publicly traded stocks or bonds may be appropriate and improve long-term expected performance. This should be balanced against the client’s needs for liquidity and concerns around complexity.
Jay Winthrop, partner, Douglass Winthrop Advisors: We only view bonds as an alternative to cash, not as an offensive weapon for seeking investment return. Alternatives have, in our view, substantial drawbacks for the average taxable investor. That leaves us with a default position of being overweight equities. That’s always been our approach, but now, with where interest rates are, we are at the very high end of our allocation to equity.
If we are mandated to be 85/15, let’s say, we are at 85% for equities. We have a fairly concentrated portfolio of about 30 companies, and all of them meet five or six core tests: They all have wide economic moats, pristine balance sheets, abundant reinvestment opportunity, they trade at valuations we believe represent discounts to their intrinsic value, and they’re run by managements that are very shareholder oriented. In the current environment, where you have high equity prices but even higher bond prices, we are adding a few other factors. We’re really favouring businesses that have a high degree of pricing power, that have a low degree of capital intensity—meaning they don’t require external financing to fund operations—and that are addressing large global markets.
Andrew Burish, advisor, UBS: Based on UBS’s capital market assumptions, we prefer a 45%-25%-30% allocation: 45% is in U.S. and foreign equities, 25% is in short-duration fixed income, and 30% is in alternative investments. Most of our clients are either accredited investors or qualified purchasers; they either have a net worth of $2 million minimum or $5 million minimum. That gives us a lot more flexibility for the 30% that we use in alternatives.
[By using alternatives], we reduce risk while maintaining projected returns, or we enhance projected returns while maintaining the same risk. That 30% alternatives sleeve could be a blend of private equity, hedge funds and private real estate. For people who need income, we utilize a liquidity strategy. We’ll take out one to three years of income that they’ll need and we keep that in a separate strategy with short-duration fixed-income investments. This allows a client to go out further on the risk spectrum within their 45-15-30 investment strategy if needed to meet their financial planning goals.
The 45% that’s in stocks would probably be split with 30% in U.S. stocks, diversified across small-cap, mid-cap and large-cap, and 15% in foreign—developed markets and emerging markets in a pooled vehicle of some kind. It’s a little bit overweight the U.S., but there’s a big dose of foreign stocks in there.
Matt Gulbransen, president, Pine Grove Financial Group: The first thing we’re doing is resetting expectations. For that client who is used to making 7% or 8% this past decade, and thinks that will continue in retirement, we’re rethinking that. We’re not completely abandoning bonds in that 60/40 model, but we’re definitely taking 20% of that allocation, give or take, and trying to find alternative, non-correlated asset classes that can generate bond-like returns without the interest-rate and credit risk. We’ve done some real estate-type investments like data centres and cellphone towers. Things like that might be a little bit different, but they still provide stable fixed income. A lot of open-ended ETFs or mutual funds will invest in companies that own those types of real estate. There are real estate trusts that are designed specifically to buy data centres that have long-term corporate leases and then kick out [income] just like an industrial property or an office property.
We’re also going more into hedging-type strategies. We’re trying to put a fence around the volatility of your portfolio: If the market’s up 20% or 30% you’re going to hit the top of that fence and you’re not going to make more than that. But if the market goes down 30% or 40%, you’re not going to have that downside volatility. We are outsourcing that to managers. For us it’s well worth the 30 to 50 basis points that you pay for a good ETF or mutual fund that can do a covered call or some sort of options strategy to hedge out of the volatility of the stock market.
Scott Tiras, advisor, Ameriprise: As we build our allocations, we continue to consider the unique challenges of the low-yielding fixed income market. While we strongly believe in keeping a good portion not in stocks for most of our clients, we also recognize the need for this portion to contribute to the portfolio’s returns. We sometimes tell our clients that stocks are for capital appreciation purposes and bonds are more for capital preservation purposes.
One strategy we employ is to add a bit more exposure to non-traditional equities and reduce the fixed-income exposure to about 30%. However, we then need to turn the volume down on the risk in the equity portfolio to offset the additional market risk. We do this by looking at higher quality large-cap dividend stocks and REITs that do not have exposure to shopping centers or office buildings and provide a good yield. We are also keeping a close eye on the availability of shorter-term—less than three-year maturity—equity structured notes that provide a limit or buffer on the downside, but leverage on the upside. For fixed income, we’re including more Treasury Inflation Protected Securities (TIPS) and ETFs or funds with a bit more credit risk than interest rate risk.
Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: November 4, 2021
Following the devastation of recent flooding, experts are urging government intervention to drive the cessation of building in areas at risk.
Private club memberships and luxury cars are some of freebies on the table.
When Ryan Wolitzer was looking to buy an apartment in Miami Beach late last year, several beachfront properties caught his eye. All were two-bedroom homes in high-end buildings with amenities aplenty and featured glass walls, high ceilings and an abundance of natural light. But only The Continuum, in the city’s South of Fifth district, came with a gift: a membership to Residence Yacht Club, a private club that offers excursions on luxury yachts ranging from a day in south Florida to a month around the Caribbean. Residents receive heavily discounted charters on upscale boats that have premier finishes and are stocked with top shelf spirits and wine. Mr. Wolitzer, 25, who works for a sports agency, was sold.
“The access to high-end yachts swayed my decision to buy at The Continuum and is an incentive that I take full advantage of,” Mr. Wolitzer said. “It’s huge, especially in my business when I am dealing with high-profile sports players, to be able to give them access to these incredible boats where they experience great service. I know that they’ll be well taken care of.”
Freebies and perks for homeowners such as a private club membership are a mainstay in the world of luxury real estate and intended to entice prospective buyers to sign on the dotted line.
According to Jonathan Miller, the president and chief executive of the real estate appraisal and consulting firm Miller Samuel, they’re primarily a domestic phenomenon.
In the U.S. residential real estate market, gifts are offered by both developers who want to move apartments in their swanky buildings and individuals selling their homes. They range from modest to over-the-top, Mr. Miller said, and are more prevalent when the market is soft.
“When sales lag, freebies increase in a bid to incentivize buyers,” he said. “These days, sales are slowing, and inventory is rising after two years of being the opposite, which suggests that we may see more of them going forward.”
Many of these extras are especially present in South Florida, Mr. Miller said, where the market is normalizing after the unprecedented boom it saw during the pandemic. “The frenzy in South Florida was intense compared with the rest of the country because it became a place where people wanted to live full time,” he said. “Now that the numbers are inching toward pre-pandemic levels, freebies could push wavering buyers over the finish line.”
Kelly Killoren Bensimon, a real estate salesperson for Douglas Elliman in Miami and New York, said that the gifts that she has encountered in her business include everything from yacht access and use of a summer house to magnums of pricey wine. “One person I know of who was selling a US$5 million house in the Hamptons even threw in a free Mercedes 280SL,” she said. “They didn’t want to lower the price but were happy to sweeten the deal.”
A car, an Aston Martin to be exact, is also a lure at Aston Martin Residences in Miami’s Biscayne Bay. Buyers who bought one of the building’s 01 line apartments—a collection of 47 ocean-facing residences ranging in size from 325 to 362sqm and US$8.3 million to US$9 million in price—had their choice of the DBX Miami Riverwalk Special Edition or the DB11 Miami Riverwalk Special Edition. The DBX is Aston Martin’s first SUV and retails for around US$200,000. It may have helped propel sales given that all the apartments are sold out.
The US$59 million triplex penthouse, meanwhile, is still up for grabs, and the buyer will receive a US$3.2 million Aston Martin Vulcan track-only sports car, one of only 24 ever made.
“We want to give homeowners the chance to live the full Aston Martin lifestyle, and owning a beautiful Aston Martin is definitely a highlight of that,” said Alejandro Aljanti, the chief marketing officer for G&G Business Developments, the building’s developer. “We wanted to include the cars as part of the package for our more exclusive units.”
The US$800,000 furniture budget for buyers of the North Tower condominiums at The Estates at Acqualina in Sunny Isles, Florida, is another recent head-turning perk. The 94 residences sold out last year, according to president of sales Michael Goldstein, and had a starting price of US$6.3 million. “You can pick the furniture ahead of time, and when buyers move in later this year, all they’ll need is a toothbrush,” he said.
Then there’s the US$2 million art collection that was included in the sale of the penthouse residence at the Four Seasons Residences in Miami’s Brickell neighbourhood. The property recently sold for $15.9 million and spans 817sqm feet. Designed by the renowned firm ODP Architects, it features contemporary paintings and sculpture pieces from notable names such as the American conceptual artist Bill Beckley and the sculptor Tom Brewitz.
But it’s hard to top the millions of dollars of extras that were attached to the asking price in 2019 of the US$85 million 1393sqm duplex at the Atelier, in Manhattan’s Hell’s Kitchen neighbourhood. The list included two Rolls-Royce Phantoms, a Lamborghini Aventador, a US$1 million yacht with five years of docking fees, a summer stay at a Hamptons mansion, weekly dinners for two at lavish French restaurant Daniel and a live-in butler and private chef for a year. And the most outrageous of all: a flight for two to space.
It turned out that the so-called duplex was actually a collection of several apartments and a listing that went unsold. It did, however, generate plenty of buzz among the press and in real estate circles and was a marketing success, according to Mr. Miller.
“A listing like this that almost seems unbelievable with all the gifts will get plenty of eyeballs but is unlikely to push sales,” he said. “Empirically, it’s not an effective tactic.”
On the other hand, Mr. Miller said that more reasonable but still generous freebies, such as the membership to a yacht club, have the potential to push undecided buyers to go for the sale. “A nice but not too lavish gift won’t be the singular thing toward their decision but can be a big factor,” he said. “It’s a feel-good incentive that buyers think they’re getting without an extra cost.”
Examples of these bonuses include a membership to the 1 Hotel South Beach private beach club that buyers receive with the purchase of a residence at Baccarat Residences Brickell, or the one-year membership to the Grand Bay Beach Club in Key Biscayne for those who spring for a home at Casa Bella Residences by B&B Italia, located in downtown Miami and a residential project from the namesake renowned Italian furniture brand. The price of a membership at the Grand Bay Beach Club is usually a US$19,500 initiation fee and US$415 in monthly dues.
Still enticing but less expensive perks include the two-hour cruise around New York on a wooden Hemmingway boat, valued at US$1,900, for buyers at Quay Tower, at Brooklyn Bridge Park in New York City. The building’s developer, Robert Levine, said that he started offering the boat trip in July to help sell the remaining units. “We’re close to 70% sold, but, of course, I want everything to go,” he said.
There’s also the US$1,635 Avalon throw blanket from Hermes for those who close on a unit at Ten30 South Beach, a 33-unit boutique condominium; in Manhattan’s Financial District, a custom piece of art from the acclaimed artist James Perkins is gifted to buyers at Jolie, a 42-story building on Greenwich Street. Perkins said the value of the piece depends on the home purchase price, but the minimum is US$4,000. “The higher end homes get a more sizable work,” he said.
When gifts are part of a total real estate package, the sale can become emotional and personal, according to Chad Carroll, a real estate agent with Compass in South Florida and the founder of The Carroll Group. “If the freebie appeals to the buyer, the transaction takes on a different dynamic,” he said. “A gift becomes the kicker that they love the idea of having.”
Speaking from his own experience, Mr. Carroll said that sellers can also have an emotional connection to the exchange. “I was selling my house in Golden Isles last year for US$5.4 million and included my jet ski and paddle boards,” he said. “The buyers were a family with young kids and absolutely loved the water toys.” Mr. Carroll could have held out for a higher bidder, he said, but decided to accept their offer. “I liked them and wanted them to create the same happy memories in the home that I did,” he said.
The family moved in a few months later.