| April 14, 2023

Finance reporters love to declare the death of reliable rules of thumb. I understand this, coming up with things to write about is not always the easiest thing to do. Yet, I have had to debunk the death of these useful guides repeatedly since the invention of quantitative easing. Two of these are the 4% rule and the 60/40 rule.

The 4% rule is an estimate of how much a person can withdraw from a portfolio divided between stocks and bonds. It is related to the 60/40 rule under which moderate investors can attain both growth and income from a portfolio of 60% stocks and 40% bonds. This Wednesday, Hardika Singh of The Wall Street Journal announced that “the classic 60-40 investment strategy is working again.” * I am unaware that anyone ever claimed that any strategy worked every calendar year. These are only rules of thumb after all.

The 4% rule’s death is the easiest to dismiss. The claim comes from the fact that the Federal Reserve (Fed) kept rates below 4% for years. Of course, stocks generally go up when rates go down, so when rates drop below 4% we should see gains in stocks over time. Stocks have been cooler for a while now, but T-bill rates are over 4%. Dividends are not bad either. Disciplined investors should be fine over time.

Reports of the death of the 60/40 rule comes from last year's poor results for the model. For someone whose time horizon is one year, that was bad. Hopefully, nobody who needed large sums of money last year invested all of it in a 60/40 portfolio, a 40/60 portfolio, or any other portfolio other than cash and short-term debt. That we must keep money in low volatility and liquid investments when we know that we will need it in less than a year is another reliable rule of thumb. Over time, diversified portfolios are intended only for those with long time horizons, which is another rule that is not dead.

Rules of thumb are helpful, but only for doing quick mental math or for the illustration of concepts. I use them when I first meet new clients and usually know whether people have a realistic chance of achieving their goals before the end of the first meeting. We use financial planning, multiple meetings, and portfolio management to help people clarify their goals, know how much they must save or can spend, and increase their chances of success.

In the future, there will be many events and government policies that distort the behavior of markets. I shall continue to use mental rules as they are intended because, to paraphrase Samuel Clemens, reports of their death are greatly exaggerated.

* Singh, H. "The 60-40 Investment Strategy Is Back After Tanking Last Year: The recovery has emboldened investors who didn’t stray from the approach during 2022’s market tumult." The Wall Street Journal, Online, April 12, 2023. Accessed on 04.13.2023.