Personal Wealth Management / Expert Commentary

Fisher Investments’ Founder, Ken Fisher, Discusses Asset Allocation and the 60/40 Debate

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher shares his thoughts on the conventional recommendation of a 60% equities/40% fixed income portfolio and its viability for most investors. As Ken details, a 60/40 portfolio is likely not the best approach to help most long-term investors achieve their goals. According to Ken, longer investment time horizons require a higher proportion of equities—and time horizons are often longer than investors expect. With longer time horizons, not having enough equities in your portfolio could increase the risk of running out of money in retirement for some investors.

Ken believes an investor’s time horizon and goals are key factors in determining a suitable investment asset allocation. Ken says equities have historically outperformed fixed income over long time horizons—20, 25 or even 30 years—making them a better choice for investors with long-term goals. Ken thinks investors should primarily use fixed income in their portfolios to dampen short-term volatility. Therefore, a higher proportion of fixed income might make sense for investors with shorter time horizons or goals.

Transcript

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A man appears on the screen wearing a navy suit, sitting in an office in front of a fireplace.

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Ken Fisher doing hand gestures time to time explaining.

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Ken Fisher: Just recently there's been a lot of discussion about is the traditional concept in the financial world of advice of a 60/40 portfolio meaning 60% equity, 40% fixed income or minor variations thereof.

Now somehow, some way obsolete.

Ken Fisher: Um, this argument has been fuelled partly by comments from BlackRock and partly by comments from Goldman Sachs, the one being more optimistic about the equity future and the other being more pessimistic about the future.

Ken Fisher: And what I would say is that this discussion in many ways was obsolete when I was very young, 60/40 for most people is wrong.

It always was.

Ken Fisher: Let me try to take you through that. And bear with me as I just go into some nuances at first that may seem tangential, but really aren't.

Ken Fisher: The fact of the matter is that the equity allocation that you should have more than not, not solely, is driven by what your long-term needs are. And with most people, when you ask them what do you really need your money to do for you? What are you really trying to accomplish? What's your purpose?

The most common answer that you hear over and over again, is some minor variation of to take care of

me and my spouse the rest of our lives.

If the person's single, maybe just take care of me the rest of my life.

Those are the answers you hear most commonly then ameliorated by phrases like oh, I'd like to leave some money to my children, or before death, or after death, I want to leave some money to charity.

But the big one is take care of me

and my spouse the rest of our lives.

The next logical question so how

long are you going to live?

Well, nobody really knows.

But if you look at your parents average age of death and your grandparents average age of death and compare your personal health and living standards to theirs, you get some clue relative to what your current age is.

Ken Fisher: And mostly people have been living once they get past the young ages that people die at up through their 30s, they've been living longer and longer.

And so, if you're your classic 60-year-old facing retirement 50, 60, 70 years ago the average person maybe

was living five to ten more years, maybe 15.

Ken Fisher: But now the odds are that they're living up into their mid- late eighties.

And that probably keeps increasing.

So, then you say to yourself when you look at long time periods, what does better, stocks or bonds?

And ultimately, if you don't have enough stock in the portfolio, you run the risk of running out of capital when you're old.

And being aged and poor is about as brutal a thing as you can possibly do to yourself.

Being young and poor isn't such a tough thing.

We pretty much all did that when we were very young people when we were in our 20s.

But being aged and poor, that's brutal.

Ken Fisher: And so really what you want to do is sit there and say, well, if I've got a 20 year, or a 25 year, or a 30-year time horizon, you really want to have a lot more than 60% in equity, because the odds in those time periods of equity doing better than fixed income are overwhelming.

Always have been.

And in the few instances over those kind of time periods where fixed income did better than equity,

fixed income only did that much better.

Ken Fisher: So, the reality is, what's the role of

fixed income in a portfolio at all?

And the answer is, to a large extent,

to dampen the volatility in the portfolio.

But if you've got 25 or 30 years ahead of you in your life, or you and your spouse's life, second to

die, the fact becomes, for the first good number of years, you don't really need to dampen the volatility that much.

In my mind, 60/40 was obsolete when it was first conceived and too much associated with just kind of a standard way that the financial services word sold you on things.

But if you've got a long time

horizon, you need a bigger equity allocation.

Ken Fisher: Now, if you've got a shorter time horizon that goes the other way around, let's say compared to your parents and your grandparents, your health is not good for whatever

your circumstances are, and they died in, let's say, ten years from your age now, so that you probably die

maybe even younger than that.

The shorter you make that time horizon, the more you want to reduce the equity, because you don't need the money to last as long, and the volatility in the short term can actually eat into what you need every year in those last years of your life.

So, I encourage you to think about how long do you need this money to really last for you? How long is your time horizon ahead? Remember that 20 or 25 or 30 years is a really long time.

Ken Fisher: Over those time periods, equity always does better than fixed income, or in the few instances

where it hasn’t in rolling periods that long, only done a little bit worse.

And think about the fact that you probably need a lot more equity than any 60/40 allocation actually suggests for you.

Thank you very much for listening to me.

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