How does 60:40 portfolio strategy work?

60:40 portfolio strategy has been one of the most common investment strategies since ages. The reason for the same is its reasonable returns with moderate risk characteristics. This portfolio strategy basically means that you should hold 60 per cent in equity and 40 per cent in debt at all times. Although, this portfolio would not provide returns as high as the dynamic portfolio strategy but it carries risk lesser than the dynamic portfolio strategy.

This portfolio strategy is usually adopted by moderate risk takers. Having said that, a question arises-does this portfolio strategy work in real life as well? To find it out, we carried out a study wherein, we maintained 60 per cent equity and 40 per cent debt allocation at all times. We considered S&P BSE 100 as equity and S&P BSE 10-year sovereign bond as debt. To maintain its proportion, we have rebalanced it every year. We have also assumed that you require a corpus of Rs one crore at the start of the retirement period.

Also, to get a feel of the real-world application, we have assumed a person aged 30 years having present value of monthly retirement expenses of Rs 30,000 and inflation to be seven per cent with post-retirement rate of return to be eight per cent. With this study, what we are trying to understand is that whether a person can rely on this strategy to fund his 20-year retirement period? The retirement period is assumed to be from the year 2000 to 2019.

We can see in the above graph how investment of retirement corpus of Rs one crore is moving in respect to the inflation-adjusted withdrawals. Here, we must say that the rebalancing every year has turned out to be positive. Adopting this strategy with a conservative assumption of eight per cent rate of return post-retirement, this strategy actually works. However, an important thing to note is that this study has been carried out in a particular period i.e. from the year 2000 to 2019. Hence, we cannot predict whether the same situation would arise in future as well. So, having a financial plan in such a case does make a significant difference.