Author Burt Malkiel: 60/40 Rule Is Dangerous

Wednesday, 27 Nov 2013 04:09 PM

By Michael Kling

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Investors following the 60/40 rule, that you should allocate 60 percent of portfolios to equities and 40 percent to bonds, will be "badly hurt," warns Burt Malkiel, author of "A Random Walk Down Wall Street."

"The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40," Malkiel, a Princeton professor and Wealthfront chief investment officer, told CNBC. "It's a totally reasonable thing to want stability, but it is not clear to me that that means bonds, or U.S. bonds, specifically."

When Malkiel first wrote his book, bond yields were much higher. With total bond market yields now around 2.4 percent, he says investors should hold more high-quality dividend growth stocks as well as some bonds of foreign countries with low debt-to-GDP yields and relatively high yields.

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Bond indexes are also a bad choice in the current era of high government deficits and low interest rates because they may mostly hold government or agency bonds.

Malkiel says he never liked those kinds of general one-size-fits-all rules. The right allocation strategy depends on individual circumstances. Personality is also a factor. Some investors cannot tolerate the stock market's volatility.

"I can understand that," he told CNBC. "It depends on your ability to not go crazy and sell at the wrong time when the equities drop, as they do."

Investors have more than bonds to turn to for stability. Some financial advisors recommend gold. Others even push hedge funds. Malkiel disagrees, calling a hedge fund charging 2.2 percent "a sure loser."

As for gold being recommended as a hedge against Armageddon, Malkiel says, "If the world disappears, your asset allocation will be the least of your concerns."

Instead, investors seeking broad diversification should look into emerging markets or real estate investment trusts, he says. "Real estate is a hard asset, good when inflation is low."

Prompted by low bond yields, investors have been piling into alternative investments, such as nontraditional bonds. Advisors still using traditional strategies call that trend overdiversification, saying the strategy offers little long-term value, reports InvestmentNews.

"There's been pretty significant inflows in anything you can dress up as an alternative strategy in the past five years," James Osborne, president of Bason Asset Management, told InvestmentNews. "Everyone is looking for the silver bullet. Everyone is looking for returns without risk. From a performance standpoint, it hasn't been good for people to chase those returns."

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