Transcript:
Easan Arulanantham:
“Last week, you mentioned the 60/40 portfolio is really efficient. What does that mean? What are you talking about when you say “efficient?”
Tom Vaughan:
So, efficiency has at least with investing, in my opinion, has to do with what return you’re getting for each unit of risk that you’re taking. So risk can be analyzed a lot of different ways. There’s a whole bunch of different ways, and I won’t get too technical here, but for every unit of risk you’re taking, what return are you getting? And so a 60/40 portfolio tends to have the most return per unit of risk, if that makes sense. And so they have a thing called the “Efficient Frontier.” And it’s actually a chart where you’ve got, on one side you’ve got the return, and then over here, you’ve got the sorry, this is the risk, and this is the return. And so they plot like every possible return for different mixtures of stock and bond. And what you find is, again, on that chart, the portion that is closest to the all highest return for no risk, which doesn’t exist is a 60/40 portfolio.
So that’s what they’re talking about there. There’s a whole bunch of debate about this right now, and what is 60/40? And boy, when you just say, stock versus bond? Boy, there’s so many different types. Then what about alternatives? What about metals? And all those types of things, as far as that goes, and it gets pretty controversial. But in general, that’s what they’re talking about when they talk about 60/40. And you’ll hear this a lot. And honestly, by chance, our portfolio, our mixture, within our practice is 61% stock and the rest bond and cash. And again, that’s because that’s not like by design: That’s 270 households, all choosing the risk level that they want, for that return. Living with that for decades, making adjustments. And they have ended up at that spot, exactly. I’m not like a huge proponent, ‘everybody has to be in there.’
We got people in 10% stock, people in 100% stock. But the average is 61% within the practice, which tells you. And again, these people are living with it. They’re watching these things day by day, or month, by month or year by year. and they’re they’re liking what they’re seeing. And that… combination is around 60/40. So in even in the real world, ignoring all of the fancy Efficient Frontier concepts and what have you, people are gravitating towards an average of a 60/40 portfolio. I don’t push that, per se. I think it’s very personal: Each person’s risk level is unique to them and their situation. What risks they need to take, what risks they’re able to take; just mentally. So anyway, I do think it’s an interesting area. Lots of articles coming out right now about “60/40’s dead” or whatever. I don’t know, I don’t see it. Not…in the real world.