The history of the 60/40 fund goes back a century to mutual funds like Wellington with a roughly 60/40 equity/bond split to provide "long-term capital appreciation and moderate current income". I think there is a lot of confusion about 60/40 portfolios, because they are really focused on people and institutions with the need to provide long-term income and not for a 25 year old looking to building wealth without withdrawals over the next 40 years. So they get compared unfavorably to "just invest in the S&P 500" for long-term total returns which is an inappropriate comparison.
The math behind 60/40 keeps being demonstrated when people analyze portfolios for long-term sustained withdrawals for periods of 30+ years. These analyses show that 30/70 to 70/30 equity/bond ratios provide much better long-term outcomes than all stock or all bond portfolios. Bengen's original 1994 paper looked at 0%, 25%, 50%, 75% and 100% equity percentages and the 50% and 75% ratios performed best for sustained inflation-adjusted withdrawals over 30 year time frames. Morningstar recently did a detailed update looking at current market valuations and found that the 30/70 to 70/30 portfolios are still expected to provide better outcomes for providing long-term inflation-adjusted income than all bond or all stock portfolios.
Bengen's 1994 work was done just on S&P 500/intermediate T-bonds but since then Bengen, Morningstar, and others have analyzed broader portfolio compositions and they keep coming up with the same general conclusion of about 3% to 5% annual inflation adjusted withdrawals are sustainable under just about all expected market conditions over 30+ years time frames for 30/70 to 70/30 portfolios, for which "60/40" or "balanced fund" is effectively shorthand to describe that portfolio type.
The much maligned target date retirement funds follow these concepts by starting at 90% equity allocations until people are in their mid to late 40s and then follow a glide path for the equity allocation until it typically hits 20% -30% after age 70 or 80. They are usually about 50/50 at age 65. I think the financial community is adamantly opposed to TD funds because they have effectively solved for many of the small investor's financial ignorance and behavioral challenges eliminating substantial fees for the financial professionals.
You mention how raising the minimum wage pushes out the lowest educated. From my understanding, classic economic theory supports this since it is a price floor and creates deadweight loss.
My concern is that there is what seems to be an increasingly large body of empirical evidence failing to demonstrate this effect, and when reality and theory aren’t lining up that seems to indicate theoretical shortcomings. Obviously, there is a point above which the least skilled folks absolutely would get pushed out of the labor market but something else is going on.
I’m trying to be aware of my lack of training and media bubble I may exist in, and maybe there’s less than I’m aware of and the Card/Kreuger Nobel is just on my mind, is there any recent empirical work you could point me towards about that?
The history of the 60/40 fund goes back a century to mutual funds like Wellington with a roughly 60/40 equity/bond split to provide "long-term capital appreciation and moderate current income". I think there is a lot of confusion about 60/40 portfolios, because they are really focused on people and institutions with the need to provide long-term income and not for a 25 year old looking to building wealth without withdrawals over the next 40 years. So they get compared unfavorably to "just invest in the S&P 500" for long-term total returns which is an inappropriate comparison.
The math behind 60/40 keeps being demonstrated when people analyze portfolios for long-term sustained withdrawals for periods of 30+ years. These analyses show that 30/70 to 70/30 equity/bond ratios provide much better long-term outcomes than all stock or all bond portfolios. Bengen's original 1994 paper looked at 0%, 25%, 50%, 75% and 100% equity percentages and the 50% and 75% ratios performed best for sustained inflation-adjusted withdrawals over 30 year time frames. Morningstar recently did a detailed update looking at current market valuations and found that the 30/70 to 70/30 portfolios are still expected to provide better outcomes for providing long-term inflation-adjusted income than all bond or all stock portfolios.
Bengen's 1994 work was done just on S&P 500/intermediate T-bonds but since then Bengen, Morningstar, and others have analyzed broader portfolio compositions and they keep coming up with the same general conclusion of about 3% to 5% annual inflation adjusted withdrawals are sustainable under just about all expected market conditions over 30+ years time frames for 30/70 to 70/30 portfolios, for which "60/40" or "balanced fund" is effectively shorthand to describe that portfolio type.
The much maligned target date retirement funds follow these concepts by starting at 90% equity allocations until people are in their mid to late 40s and then follow a glide path for the equity allocation until it typically hits 20% -30% after age 70 or 80. They are usually about 50/50 at age 65. I think the financial community is adamantly opposed to TD funds because they have effectively solved for many of the small investor's financial ignorance and behavioral challenges eliminating substantial fees for the financial professionals.
Voting republican may not kill you, but republican (red) states are the poorest and least healthy in the US. Bad health tends to kill you sooner.
Hi Allison, thanks for the news letter!
You mention how raising the minimum wage pushes out the lowest educated. From my understanding, classic economic theory supports this since it is a price floor and creates deadweight loss.
My concern is that there is what seems to be an increasingly large body of empirical evidence failing to demonstrate this effect, and when reality and theory aren’t lining up that seems to indicate theoretical shortcomings. Obviously, there is a point above which the least skilled folks absolutely would get pushed out of the labor market but something else is going on.
I’m trying to be aware of my lack of training and media bubble I may exist in, and maybe there’s less than I’m aware of and the Card/Kreuger Nobel is just on my mind, is there any recent empirical work you could point me towards about that?