“I believe that if you blanket a 60-40 portfolio on someone because they’re in retirement, you’re not assessing their ability to take risk,” said Lazaroff. “Asset allocation is really subjective, relative to the size of the portfolio and the time horizon. Some people use risk tolerance questionnaires, but a client could be later in life and some of their money, in many cases a lot of their money, is intended for the next generation, which extends their time horizon.”
Attempts to replace portions of an equity allocation with equity-like fixed income products, like preferred stocks or high yield bonds, ignores the impact such changes have to a portfolio’s risk profile.
Similarly, using dividend-paying equities to provide investment income while bonds come with low yields and, in many cases, declining values, is also an imperfect fix, said Sam Pittman, a senior researcher at Russell Investments.
“A lot of our advisors love high-yield portfolios—it drives me crazy,” said Pittman. “What you want is the most efficient portfolio you can build. As soon as you put a constraint that you want a certain level of yield, you’re sacrificing your ability to be efficient.”
Moisand pointed out that most dividend stocks suffered large losses as a result of the 2008 financial crisis—losses that weren’t mitigated by the payment of dividends to investors.
Even more concerning to the panelists, including Lazaroff, is the embrace of illiquid, opaque alternatives as analogues to an equity or fixed-income allocation.
“A lot of the attractive diversifiers out there don’t really work anymore,” said Lazaroff. “Ultimately, I’m not afraid to sell simplicity. I talk about a plan, I don’t predict. The more alts you add, the more cost there is. I think people underestimate the cost concern added to risk premiums.”
A 60-40 portfolio is also no longer a guarantee of safety, argued Hill, noting that some balanced portfolios lost as much as 30 percent of their value during the 2008 financial crisis.
The assumption that lower returns will prevent an investor from reaching their goals is simply untrue, said Moisand. Advisors and their clients still have other options that will help them reach their goals outside of concentrating on income and diversifying to esoteric asset classes.
“Equities are still expected to outperform a 4.5 percent withdrawal rate by the vast majority of credible parties,” said Moisand. “You can increase an equity allocation to get the intended result, so the lower returns may not be the problem that we’re making them out to be.