The right recipe for everyone’s portfolio

For an unexplained reason, the government has an obsession with the ratio 60:40. The new rules that scrap the dividend tax credit on Isas tacitly push investors towards this mix of bonds and equities (the credit will remain only if a fund has a minimum of 60% in bonds). Meanwhile, the stakeholder medium-term savings product suggested by the Sandler Review is another 60:40 product, this time with equities capped at 60%. So where do these magical figures come from? In this week’s cover story on page 26, James Daley shows the justification is far from watertight.
Just what is the right recipe for successful investing? One widely quoted mantra argues that the percentage of bonds investors should hold in their portfolios equates to their age. So 60-year-olds approaching retirement need to limit the risks in their portfolios by holding 60% in bonds, while 25-year-olds can take more risks and exploit the superior long-term returns of equities by holding just 25% bonds in their portfolios.
Bedlam Asset Management had a different viewpoint in its Pick of the Week briefing last week. It said instead that a bell-curve approach is the solution. Babies and centenarians should have identical weightings of 100% equities because the former have a long time horizon, while the latter should not worry if their savings run out in five years. Married couples in the middle ground should shy away from equities because of the colossal liabilities they have, returning only once their “brutish offspring have at least reached puberty or been sold”.
The trouble with any rules that stipulate equity-bond mixes is that they become too rigid when applied to individuals and market conditions. Individuals have different personal circumstances and different attitudes to risk. Such rules take no regard of market cycles: many bond fund managers would agree that now is not a particularly good time to invest in bonds given the limited potential for capital appreciation. At other times, it is prudent to get out of certain equity sectors, if not all of them. There are also times when it is a good idea to be 100% in cash, no matter what your age.
The Government needs to take heed that the 60:40 ratio is not golden, whichever way it is weighted. And it should not skew tax treatment towards one asset class or the other, tempting investors to let tax incentives flavour the investment mix.