These days, many suggest it's important to have more than 60 percent invested in stocks. That's because retirement can stretch for several decades, and investors will increasingly need to rely on stocks to limit the risk of outliving their savings.
Also, the long-term outlook for bonds is poor: Yields are near all-time lows; interest rates are certain to climb eventually.
Another criticism: The 60/40 approach is too narrow to build a truly diversified portfolio, because it fails to consider alternative asset classes. Think of investments in commodities such as oil, precious metals, or real estate investment trusts. Alternatives may also include using complex strategies that hedge funds pioneered to protect against losses when stocks plunge or inflation spikes.
These approaches are readily available. Hundreds of mutual funds using alternative assets or strategies have been launched in recent years.
The Associated Press interviewed two experts in asset allocation to get to the heart of the debate.
Ben Inker, a 60/40 critic, is coleader of asset allocation for GMO, which manages $104 billion for institutional clients such as endowments and pension funds, and co-manages Wells Fargo Advantage Absolute Return, a mutual fund that uses alternative strategies.
Fran Kinniry, who embraces traditional stock-and-bond portfolio construction, is a principal in the investment-strategy group at Vanguard, the nation's largest mutual-fund company, managing more than $2 trillion.
Following are excerpts of their arguments.
Inker: One reason I'm skeptical about 60/40 is that it's probably not aggressive enough, at least for a 40-year-old investor. You need to invest more in assets that are riskier than bonds if you want to meet your investment goals without having to save an extremely large percentage of your income.
If you're 40, you've got about 25 years before retirement. With significantly more than 60 percent in stocks, you'll have a much better chance to achieve your retirement-savings goals than you would with just 60 percent. Your main investment goal at that point in life should be trying to generate the highest return on your savings.
While an aggressive allocation to stocks makes sense at that age, that doesn't necessarily mean you can rely on alternative assets to diversify a portfolio. The problem that a 60/40 portfolio presents is that you can't rely entirely on bonds as a diversifier, either. They have been good diversifiers in recent years because we've had low inflation. In fact, higher-quality bonds like Treasury notes have been especially good diversifiers.
But if the future risk is from rising inflation, bonds aren't going to help.
Kinniry: It's true there are challenges now for investors with 60/40 portfolios, because of the risks bond investors face. It will be mathematically impossible to replicate the strong returns bonds have delivered in the last 30 years.
But I'd warn investors who want to leave traditional bonds for more exotic asset classes. It has not been demonstrated that those assets can diversify a portfolio when stocks are falling. We shouldn't expect alternative assets to provide a diversification benefit during the next bear market.
Consider the performance of the larger college endowments that invested in alternative assets over the years. Traditional stock-bond portfolios have been killing many of those endowments in terms of performance. That's been the case whether you go back one year or three, five, or 15. The attempt to get more exotic hasn't worked.
It's true that a lot of alternative assets perform out of sync with the stock and bond markets, so that your portfolio will deliver steadier returns if you invest in alternatives. But the time that you really want diversification is when the primary asset in your portfolio - stocks - is falling sharply.
Vanguard has done research examining the performance of various assets, including alternatives, when stock performance has been the worst - the bottom 10 percent of the performance spectrum, historically. Nearly all the assets posted losses at the same time that stocks were plunging. That was the case for everything: foreign stocks to real estate investment trusts to commodities, high-yield bonds, emerging-markets bonds, hedge funds, and private equity.
There were only two assets that had positive returns during those periods: Treasury bonds and investment-grade corporate and municipal bonds. That supports the case for maintaining a basic stock-and-bond mix.