Why the 60/40 portfolio is no longer good enough

Over the years, a large number of financial planners and stockbrokers have carefully designed a portfolio of 60% stocks and 40% bonds or other fixed income products for their clients. These so-called balanced portfolios performed well throughout the 1980s and 1990s.

However, a series of bear markets that began in 2000 and historically low interest rates have weakened the popularity of this basic investment method. Some experts now say that a diversified investment portfolio must include more asset classes than just stocks and bonds. As we will see below, these experts believe that a broader approach must now be taken to achieve sustainable long-term growth.

Key points

  • Once the mainstay of savvy investors, a 60/40 balanced investment portfolio does not seem to keep up with today’s market environment.
  • Many professionals now no longer broadly allocate 60% to stocks and 40% to bonds, but instead advocate different weights and spread across larger asset classes.
  • In particular, alternative investments such as hedge funds, commodities and private equity, and inflation-protected assets are new members of the comprehensive portfolio.

Changing market

Bob Rice, Chief Investment Strategist of Tangent Capital, a boutique investment bank, speaks at the 5th Annual Conference Investment News Alternative Investment Conference. There, he predicted that the 60/40 portfolio is expected to grow only at a rate of 2.2% per year in the future, and those who wish to fully diversify will need to explore other alternatives, such as private equity, venture capital, hedge funds, timber , Collectibles and precious metals.

Rice cited several reasons why the traditional 60/40 portfolio that has worked in the past few decades seems to perform poorly: due to high stock valuations; monetary policy that has never been used before; increased risk for bond funds; and commodities Low prices in the market. Another factor is the explosive growth of digital technology, which has greatly affected the growth and operations of the industry and the economy.

“You can no longer invest in one future; you have to invest in multiple futures,” Rice said. “The things that pushed the 60/40 portfolio to work are broken. The old 60/40 portfolio did what customers wanted, but these two asset classes alone can no longer provide these. Very convenient and easy , And it’s over. We no longer fully believe that stocks and bonds can provide income, growth, inflation protection, and downside protection.”

Rice continues to cite Yale University’s endowment fund as a typical example of how traditional stocks and bonds are no longer sufficient to generate substantial growth with controllable risks. The fund currently only allocates 5% of its portfolio to stocks, 6% to any type of mainstream bonds, and 89% to other alternative industries and asset classes. Although the allocation of a single portfolio cannot of course be used to make broad forecasts, the fact that this is the lowest allocation of stocks and bonds in the history of the fund is significant.

Rice also encourages consultants to consider a different set of alternative bond products, such as master limited partnerships, royalties, debt instruments in emerging markets, and long/short bonds and equity funds. Of course, financial advisors need to include small and medium-sized clients into these asset classes through mutual funds or exchange-traded funds (ETFs) to maintain compliance and effectively manage risks. However, more and more professional or passive management tools can provide diversification in these areas, which makes this approach more and more feasible for clients of any size.

Alternative portfolio

Alex Shahidi, JD, CIMA, CFA, CFP, CLU, ChFC-Teaching Professor at California Lutheran University, Investment Managing Director of California Century City Merrill Lynch, and Institutional Advisor-IMCA Investment and 2012 Wealth Management Magazine. In this paper, Shahidi outlines the shortcomings of the 60/40 combination and its historical underperformance in certain economic environments. Shahidi said that using historical return data dating back to 1926, this combination is almost as risky as a portfolio composed entirely of stocks.

Shahidi also created an alternative investment portfolio consisting of approximately 30% of Treasury bonds, 30% of Treasury Inflation Protected Securities (TIPS), 20% of stocks and 20% of commodities, and showed that over time, the portfolio will Produces almost identical returns, but the returns are much less volatile. He used tables and graphs to illustrate how his “electronically balanced” portfolio performed well in several economic cycles when traditional portfolios did not perform well. This is because TIPS and commodities tend to perform well during periods of rising inflation. Two of the four categories in his portfolio will perform well in each of the four economic cycles of expansion, peak, contraction, and trough, which is why his portfolio is able to provide with significantly reduced volatility Competitive returns.

Bottom line

The 60/40 combination of stocks and bonds has produced excellent returns in some markets, but it also has some limitations. The market turmoil of the past few decades has led to more and more researchers and fund managers suggesting broader asset allocation to achieve long-term growth at a reasonable level of risk.

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