Time to ditch the 60/40 rule?

For decades now, the 60/40 stock-vs.-bond rule has been the poster child for a moderate-risk retirement portfolio.

The formula, once widely used by pension funds, is supposed to produce relatively stable long-term growth, with bonds cushioning the risk of stocks.

But with life expectancy rising and yields on high-quality bonds still hovering at anemic levels, it seems appropriate to wonder whether the 60/40 rule remains a prudent strategy for middle-aged investors trying to ensure they don't outlive their retirement savings someday.

Some financial advisors argue that it's long past time for investors to stop behaving like it's 1984, when yields on the benchmark 10-year Treasury regularly topped 10 percent. The yield on the 10-year is now just under 2 percent.

"The traditional recommendation of 40 percent fixed-income exposure is no longer relevant to today's market environment," said Chris Hardy, founder and CEO of Paramount Investment Advisors, a fee-only advisory firm.

"It's time to let go of preferences and recognize that investors need to earn a decent amount of return for the amount of risk taken, added Hardy, a certified financial planner. "There is a lot of 'risk' in fixed income that returns less than inflation."

If the 60/40 rule is passé, then what should replace it? That, of course, depends on whom you ask.

Leon LaBrecque, CEO of fee-only advisory firm LJPR Financial Advisors, says his practice migrated away from the 60/40 rule in recent years, allocating a bit more to stocks (e.g., 65 percent or 70 percent) for clients in moderate-risk portfolios.

Perhaps 70/30 ought to be the new 60/40, said LaBrecque, who started his firm in 1989, when the yield on the 30-year Treasury was about 9 percent. The 30-year now yields just more than 2.5 percent.

"In this low-return environment, which we think will continue, the risk mitigation of bonds does not proportionally outweigh their very diminished returns," he said.

What more, bond investors, particularly those in longer-term bonds, are in for a bumpy ride when the Federal Reserve inevitably resumes its planned rate hikes, added LaBrecque. When interest rates rise, bond prices generally decline and vice versa.

"If you are in the 60/40 camp, recognize that bonds do have inherent risk, and that is the risk of interest rates going up," said LaBrecque, an attorney and CFP.

Some advisors argue that the 60/40 rule always left something to be desired. When it comes to financial planning, there are no one-size-fits-all formulas, said Harold Evensky, a CFP and chairman of fee-only advisory firm Evensky & Katz/Foldes Financial.

The 60/40 rule, he said, is "an extraordinarily rough guideline for someone who doesn't have a clue where to start."

"If someone isn't looking for professional advice, I'd say consider that rule a beginning," Evensky said.

His firm weighs several factors when it comes to making asset-allocation decisions, including the return need, risk capacity, risk tolerance and age of a given client. Age, Evensky explained, is the least important consideration.

Risk capacity has to do with the amount of risk an investor can take and still have a chance of recovering from serious setbacks to meet their financial goals, according to Evensky.

Risk tolerance, he said, is "that threshold of pain and misery just before you decide you are going to liquidate and go to cash."

Evensky says it's not uncommon for clients to find that they can achieve their financial goals below their given risk capacity and tolerance. Some clients, he said, may be able to live with an 80 percent allocation to stocks but can achieve their goals with a 50 percent allocation and go that route.

Allan Roth, CFP and founder of Wealth Logic, an hourly-based financial planning firm, said investors ought to think twice before buying into the notion that they should reach for higher returns by taking more risk with stocks.

Sure, the yields on Treasurys are relatively low right now, but so, too, is inflation, noted Roth. As measured by the Consumer Price Index, the inflation rate was less than 1 percent in 2015.

In 1980 the yield on the 30-year Treasury was about 12 percent, but inflation was a whopping 13 percent, said Roth. Real, after-tax returns on Treasurys are actually much better today than they were in 1980, he said.

Investors, he added, should remember the true purpose of high-quality bonds in a diversified portfolio when they are tempted to reach for higher-yielding alternatives.

"The purpose of fixed income has never been income," Roth said. "Bonds are the more stable part of one's portfolio.

When stocks do tank, bonds allow investors to rebalance and buy stocks when the herd is selling," he added.

Indeed, most investors don't have the stomach to ride out the volatility associated with an all-stock portfolio, even though research has shown that stocks outperform bonds over very long periods, said CFP Lewis Altfest, CEO and chief investment officer of Altfest Personal Wealth Management, a fee-only firm.

"Most people cannot take the volatility involved in having all their money in stocks," Altfest said. "They would just sell and do so at the wrong time."

— By Anna Robaton, special to CNBC.com