The Problem With 60/40 Isn’t Necessarily the 60/40

Think of buying a stock as being one of the Green Bay Packers' famous fan-owners—you wear the cheese head, celebrate wins, and loathe the Minnesota Vikings. All are requirements. I know; I grew up in Wisconsin.

Bonds are different. Buying a bond is like the bank or other lenders funding Lambeau Field's stadium expansion, where you care little (or not at all) about the scoreboard as long as your loan is paid back with interest.

For decades, the 60/40 portfolio has been a familiar starting point for investment planning: 60% in stocks for growth, 40% in bonds for income and stability. It is easy to construct, reasonably diversified, and easy to explain. But two families with identical 60/40 portfolios can experience very different financial outcomes.

Consider two retired couples, each with $2 million invested. Both have $1.2 million in stocks and $800,000 in bonds.

The first couple receives enough Social Security and pension income to cover nearly all their living expenses. Their investments provide additional income, discretionary spending, and eventually an inheritance for their children.

The second couple has no pension and needs to withdraw $100,000 annually from investments to meet household expenses.

Same portfolio allocation. Quite different jobs to do. We view bonds as the safer portion of a portfolio. But what, exactly, are we asking them to protect?

A high-quality bond may offer predictable interest payments and repayment of principal at maturity. Its market value, however, fluctuates as interest rates change. Investors who must sell before maturity can experience losses.

Does the household need monthly income, or is the bond intended to provide a specific amount of capital five years from now?

What happens at maturity? Will the principal be spent, reinvested, or used to purchase another bond? A ladder of bonds with staggered maturities can help coordinate future cash requirements. But continually reinvesting maturing bonds also introduces uncertainty about the interest rates available in future years, and probably increases costs, acting like a bond fund without institutional pricing.

Taxes introduce another consideration. Corporate bond interest is generally subject to federal and state income taxes, while Treasury interest is exempt from state income taxes. Municipal bond interest may be federally tax-exempt yet still figure into calculations affecting Social Security taxation and Medicare premiums. Whether bonds are held in taxable accounts, traditional IRAs, or Roth accounts can substantially change their after-tax usefulness.

Bonds held in taxable accounts generally qualify for a basis adjustment at death, although certain accumulated interest remains taxable. Bonds inside inherited traditional IRAs follow different income-tax rules. The account holding the investment can affect what beneficiaries ultimately receive.

None of these considerations makes the 60/40 portfolio inherently right or wrong. Nor does it make bonds better or worse investments than stocks.

The larger lesson is to stop treating bonds as one interchangeable category of safety.