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This is excerpted from chapter 3 of Ron Surz’ book, Baby Boomer Investing in the Perilous Decade of the 2020s.
The 60/40 stock/bond allocation is ubiquitous, but that’s stupid because it’s just not right for everyone, especially baby boomers. Risk preference needs to be controlled by risk capacity. Baby boomers should not take the risk inherent in a 60/40 mix at this time in their lives. Baby boomers can easily be smarter than those who blindly follow the 60/40 discipline.
Most baby boomers are following the 60/40 stock/bond rule, an asset allocation “solution” that has evolved through time and is roughly based on market composition. The total market capitalization of equities is approximately 60% (including stocks, real estate, commodities, etc). Consequently, the average individual retirement account (IRA) is invested 60/40, regardless of age. Similarly, the average target-date fund is 60/40 near the target date. Investment consultants recommend the 60/40 allocation for reasons described in the next chapter.
This needs to change if for no other reason than the 40% bond allocation is very risky when yields are near zero, as they are now.
The wrong course
Baby boomers cannot afford the risk in a 60/40 portfolio because they are in “the risk zone,” the years surrounding the beginning of their retirement. Losses sustained in the risk zone can be life shattering, reducing standard of living for the rest of a person’s life. The 60/40 lost more than 30% of its value in 2008 and the next time could be even worse.
The right course
The primary investment objective of people in the risk zone should be to protect their lifetime savings, even if it means foregoing market gains. Safety first is of paramount importance, so the right course is to invest mostly in very safe assets like Treasury bills and intermediate-term Treasury Inflation-Protected Securities (TIPS). Most baby boomers will not move to this extreme, but they should protect their savings as much as they can, even though the returns on safe assets are low. It is better to protect savings than to risk losing them at this critical time. Savings should also be protected against inflation as well. Being safe is a challenge.
