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One of investing’s most reliable, highly-recommended strategies is up over 11% this year—so why do leading financial advisors still say they rarely use it?

The most popular investing strategy in U.S. history made a comeback in 2023. After a carousel of articles labeled it “dead” due to years of underperformance, the vaunted “60-40” portfolio—which allocates 60% of its holdings to stocks and 40% to bonds—has returned more than 11% to investors so far this year. That’s nearly double its 6.4% average annual return between 2012 and 2022.

George Ball, chairman of the large private wealth manager Sanders Morris Harris, told Fortune last December that people would regret neglecting the old standby. “It was only recently when the death of the 60-40 [portfolio] was widely reported, and generally when you get that sort of headline it’s ill-timed and ill-advised,” he said in a prophetic interview.

So it appears the death of the 60-40 portfolio has been greatly exaggerated and retail investors can just lean into the old reliable option to make money moving forward, right? Well, not quite, because what is widely considered to be the most popular portfolio allocation—the 60% equity, 40% fixed income split—isn’t actually used by most financial advisors.

Here are a few of the misconceptions about the most tried and true investing play in the book—and a few options to help investors make their portfolios look more like the professionals’.

Why the 60-40 is back

For the better part of a dozen years, dating back to the Global Financial Crisis, near-zero interest rates crippled the heavy bond holdings of the classic 60-40 portfolio, making equity-focused options more appealing. This came to be called the “free money” era, and some argue it birthed not just historic stock market gains, but an “everything bubble.” 

It was a rough period for the 60-40 portfolio when more equity-focused options outperformed. But now, after more than 20 months of interest-rate hikes from the Federal Reserve, bonds are paying a solid real yield. This new period of higher interest rates is likely to make bonds—and the classic 60-40 portfolio—more appealing moving forward. 

“The intelligent investor will appreciate the trade-off between higher yields and lower but more certain returns to a greater degree than has been evident in this decade,” Ball explained. And if interest rates fall from here as inflation fades, bond prices will rise in turn, leading to some gains for investors.

That’s all well and good, but even Ball acknowledges that 60-40 is a bit, well, generic. The typical financial advice that you see in many personal finance articles that pushes retail investors to hold 60% of their portfolio in stocks and 40% in bonds was really only ever meant to be a guiding, middle-ground option—one that offers moderate risk, moderate income, and moderate price appreciation potential. It’s “a good starting place,” Todd Schlanger, a senior investment strategist at Vanguard, explained in a July article, but each investor has to “tailor a portfolio to their needs.”

What are your real investing needs?

Just ask the professionals who manage millions for high-net worth clients and it’s obvious the basic 60-40 portfolio is usually not the best option.

“We’ve never used a basic 60-40 portfolio for anything really,” Lori Van Dusen, CEO and founder of LVW Advisors, told Fortune. Van Dusen explained that she looks at clients’ profiles—this includes age, income, debt, spending habits, and more—and then “asks a lot of questions to get at risk tolerance” before creating a portfolio to fit each individual’s specific goals. 

That means the classic 60-40 portfolio doesn’t typically work for her business. A retiree may need more income and stability, making the 60-40 split too heavily weighted toward stocks. And as Schlanger explained in July, the 60-40 portfolio also might not be the best choice for the average 25-year-old. “They would likely benefit from more equities to grow their portfolio over the long run,” he said.

So while the 60-40 portfolio is definitely rebounding, and it remains a solid jumping-off point for most investors, it also may be worth spicing things up like the professionals do.

The birth and criticism of the 60-40 portfolio

Before jumping into how wealth managers allocate money for their clients in 2023, though, it’s important to discuss the birthplace of the 60-40 portfolio and why it’s become increasingly controversial.

The Nobel prize-winning economist Harry Markowitz is credited with developing the logic behind the 60-40 portfolio. In a 1952 Journal of Finance paper aptly titled “Portfolio Selection,” Markowitz made the case that investors could maximize “expected returns” at a given level of risk by diversifying their holdings. The idea was the birth of what’s called Modern Portfolio Theory, which posits that “risk-adjusted returns” (a measure of returns compared to a portfolio’s expected risk) are critical when constructing any portfolio.

While focusing on risk-adjusted returns can lead to steady gains, lower volatility, and reduced risk over time, it certainly has its critics. As Mark Spitznagel, founder and chief investment officer of the private hedge fund Universa Investments, told Fortune in August:

“Modern finance is about maximizing what they call risk-adjusted returns. And I say these are the three most deceptive, disingenuous words in all of investing. It’s sort of a cover or pretense: ‘Risk-adjusted returns’ is meant to almost distract from what really matters, which, of course, is maximizing wealth over time.”

Essentially, experts like Spitznagel argue that the logic behind the 60-40 portfolio is problematic, and that may mean investors should consider an alternative—or at least an augmented version of the classic. 

A 60-40 base—and a few ways to spice things up

Despite the pushback by some top investors, most wealth managers believe the classic 60-40 portfolio and Modern Portfolio Theory are still useful. “I don’t think 60-40 is dead. I think it’s more attractive than it was over the past 10, 12 years,” Eddie Ambrose, founding partner at Sound View Wealth Advisors, told Fortune.

Ambrose said the 60-40 portfolio could be a good starting point for many investors after the rise in interest rates over the past few years. “But I think you can dampen volatility, and maybe make your portfolio a little bit more efficient with some stuff that’s a little bit different, non-correlated,” he added, pointing to alternative investments in private credit, municipal bonds, and even real estate as options that could offer higher returns and reduce risk.

Even within the 60% equity and 40% bond categories of the 60-40 portfolio, there are endless ways to allocate capital and adjust for better performance. Brian James, managing partner and director of investments at Ullmann Wealth Partners, said he found the discussion of the 60-40 portfolio in the media “frustrating” because the question becomes “how do you define a 60-40 portfolio?”

The classic suggestion might be to put the equity portion into a total stock market fund or the S&P 500, while the bond portion stays mostly in Treasurys or corporate debt, but James noted that the 60-40 portfolio can also be much more tailored to each individual.

“Depending on the portfolio or the actual net worth of the client, we may include real estate; we may include private investments; we may include floating rate debt,” he told Fortune. “So even though the entire portfolio may be technically 60% equities, and 40% fixed income or debt instruments. It’s a very different animal.”

Alternative investments

For investors looking to boost their returns and try a different allocation to the classic 60-40, alternative investments may be the way to go.

Don’t be confused by the terminology. Alternative investments is just a fancy phrase financial advisors use to mean anything that isn’t a bond, stock, or cash. In the past, experts would rarely recommend these options to clients. (Real estate holdings certainly don’t earn financial advisors a commission.) But now there are a number of new alternative investment options investors can take advantage of, from private equity to commodities. 

The most talked about option, however, is private credit. Instead of buying corporate bonds, investors can lend money directly to companies on the private market these days. For those looking to gain exposure to a burgeoning market that can offer some pretty juicy returns, it may make sense to pay attention to private credit. 

LVW Advisors’ Van Dusen noted that with higher interest rates and banks tightening lending standards due to recession fears, the private credit market is booming as businesses look for alternative means of funding. “In my opinion, there’s a lot of opportunity there,” she said. “All of this debt that has to be restructured and companies are increasingly going to these private lenders.”

Ullmann Wealth Partners’ James also believes private credit is a “great place” for clients to invest. “A lot of companies are trying to borrow from banks, but it’s getting harder with the regulatory environment,” he explained. “So the quality of companies going to the private debt market is getting better.”

However, private credit can also be risky, and retail investors should only look into it if they have deep experience in the field or speak to a financial advisor. 

Municipal bonds

Another option for investors looking to enhance the typical holdings of the 60-40 portfolio is municipal bonds (munis). These are bonds issued by state and local governments or special districts that often help fund infrastructure projects, build schools, or finance day-to-day government operations.

Sound View’s Eddie Ambrose noted that munis offer tax advantages, solid returns, and relative safety. “Munis are good options in this environment,” he said, noting that high-income earners and retirees will benefit from the income and tax advantages in particular.

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