While saving for retirement, is a 60/40 portfolio — a strategy of allocating 60% of investments into equities and 40% into fixed-income securities and bonds — the way to go for all investors?

Evans May Wealth Managing Partner Brooke May joins Brad Smith to talk about which type of investors a 60/40 approach does and doesn't work for, and the environment enabling this investing strategy.

"When you look at fixed income, you get principle appreciation when yields go down. So as the Fed [Federal Reserve] comes in and starts to cut [interest] rates, bond yields will come down, which means the price of those bonds go up," May says. "So investors right now can get 4.5, 5% on corporate bonds. And they very well could get some principle appreciation over the next few years. So that 40% allocated to fixed income isn't going to be the drag on the portfolio as it was over the last ten years."

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

BRAD SMITH: It's time to get retirement ready. For years, investors have relied on the 60/40 rule as a guiding principle for securing their financial futures. The idea is that you allocate 60% of your investment portfolio into stocks for growth exposure with the remaining 40% towards bonds to help provide a stable income stream just in case stocks underperform. And while this may be a time-tested strategy, it may not fit your personal retirement goals. For more on retirement saving, I'm joined by Brooke May who is the Evans May Wealth Managing Partner. Great to have you here with us this morning. So first and foremost, we got to talk about the general rule of thumb here, who should and who shouldn't consider this type of 60/40 portfolio?

BROOKE MAY: Retirees are those moving towards retirement. It's not a bad way to go. If you look back over the last 10 years, the 60/40 portfolio hasn't worked. When you've got 40% of your portfolio allocated to fixed income, and fixed-income returns have been very low single digits, it's been tough to make money with a 60/40 mix, even though equities have done well. That said, moving forward, we think it's different. When you look at fixed income, you get principal appreciation when yields go down. So as the Fed comes in and starts to cut rates, bond yields will come down, which means the price of those bonds go up.

So investors right now can get 4.5%, 5% on corporate bonds, and they very well could get some principal appreciation over the next few years. So that 40% allocated to fixed income isn't going to be the drag on a portfolio that it was over the last 10 years where we saw bond rates in the 1% to 3% range.

BRAD SMITH: Certainly, so another thought around this is the efficacy of a 60/40 portfolio hinging on the actual number that a person or household needs to save or has put out there for retirement in their own planning?

BROOKE MAY: Not necessarily. We make-- at Evans May Wealth we make the mix dependent on the individual's risk tolerance. We have clients that are in their 70s and 80s and are perfectly comfortable with an all-equity allocation. We have clients that are younger and have decades before they retire, and they lose sleep at night whenever the market takes a downturn. So we allocate client stocks and bonds really according to their comfort level with equity volatility more so than where they are in that stage of their life.

BRAD SMITH: What does 60/40 look like after the Fed's rate cutting cycle here from your anticipation?

BROOKE MAY: We're optimistic on equities. We think that we're not necessarily going to continue at the same pace we've seen the last few months. But by end of by the end of the year, we think equities will be higher and then if we can get a few percentage points in fixed income from the appreciation and the income, we think that a 60/40 balanced portfolio could return 6% or 7% this year and really along those lines for the next few years to come.

BRAD SMITH: What is a good benchmark? What is a good number to base that against? You said 6% to 7% returns, what is the target that a lot of people should have?

BROOKE MAY: If we look at the S&P 500, that's a great benchmark for the equity piece. And if you look at the 10-year treasury, that's a good benchmark for the fixed income piece. So when you look at those long term averages, you can allocate them according to the percentage and the weighting, and that's how we're deriving that 6% to 7% return.