For many years, a large percentage of financial planners and stockbrokers crafted portfolios for their clients that were composed of 60% equities and 40% bonds or other fixed-income offerings. And these so-called balanced portfolios did rather well throughout the 80s and 90s.
But, a series of bear markets that started in 2000 coupled with historically low-interest rates have eroded the popularity of this basic approach to investing. Some experts are now saying that a well-diversified portfolio must include more asset classes than just stocks and bonds. As we'll see below, these experts feel that a much broader approach must now be taken in order to achieve sustainable long-term growth.
Key Takeaways
- Once a mainstay of savvy investors, the 60/40 balanced portfolio no longer appears to be keeping up with today's market environment.
- Instead of allocating 60% broadly to stocks and 40% to bonds, many professionals now advocate for different weights and diversifying into even greater asset classes.
- In particular, alternative investments such as hedge funds, commodities, and private equity, as well as inflation-protected assets are some new additions to the well-rounded portfolio.
Changing Markets
Bob Rice, the Chief Investment Strategist for boutique investment bank Tangent Capital, spoke at the fifth annual Investment News conference for alternative investments. There, he predicted that a 60/40 portfolio was only projected to grow by a rate of 2.2% per year into the future and that those who wished to become adequately diversified will need to explore other alternatives such as private equity, venture capital, hedge funds, timber, collectibles, and precious metals.
Rice listed several reasons why the traditional 60/40 mix that had worked in past few decades seemed to under-perform: due to high equity valuations; monetary policies that have never previously been used; increased risks in bond funds; and low prices in the commodities markets. Another factor has been the explosion of digital technology that has substantially impacted the growth and operation of industries and economies.
“You cannot invest in one future anymore; you have to invest in multiple futures,” Rice said. “The things that drove 60/40 portfolios to work are broken. The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore. It was convenient, it was easy, and it's over. We don't trust stocks and bonds completely to do the job of providing income, growth, inflation protection, and downside protection anymore.”
Rice went on to cite the endowment fund of Yale University as a prime example of how traditional stocks and bonds were no longer adequate to produce material growth with manageable risk. This fund currently has only 5% of its portfolio allocated to stocks and 6% in mainstream bonds of any kind, and the other 89% is allocated in other alternative sectors and asset classes. While the allocation of a single portfolio cannot,of course, be used to make broad-based predictions, the fact that this is the lowest allocation to stocks and bonds in the fund’s history is significant.
Rice also encouraged advisors to look at a different set of alternative offerings in lieu of bonds, such asmaster limited partnerships, royalties, debt instruments fromemerging markets, and long/short debt and equity funds. Of course, financial advisors would need to put their small and mid-sized clients into these asset classes through mutual funds orexchange-traded funds (ETFs)to stay in compliance and manage risk effectively. But the growing number of professionally or passively-managed instruments that can provide diversification in these areas is making this approach increasingly feasible for clients of any size.
Alternative Portfolios
Alex Shahidi, JD, CIMA,CFA,CFP, CLU, ChFC– Managing Director and Co-Chief Investment Officer at Evoke Advisors–published a paperfor the IMCA Investment and Wealth Management magazine in 2012. In this paper, Shahidi outlined the shortcomings of the 60/40 mix and how it has not historically performed well in certain economic environments. Shahidi states that this mix is almost exactly as risky as a portfolio composed entirely of equities, using historical return data going back to 1926.
Shahidi also creates an alternative portfolio composed of roughly 30%Treasury bonds, 30%Treasury inflation-protected securities (TIPS), 20% equities and 20% commodities and shows that this portfolio would yield almost exactly the same returns over time but with far less volatility. He illustrates using tables and graphs, exactly how his “e-balanced” portfolio does well in several economic cycles where the traditional mix performs poorly. This is because TIPS and commodities tend to outperform during periods ofrising inflation. And two out of the four classes in his portfolio will perform well in each of the four economic cycles of expansion, peak, contraction, and trough, which is why his portfolio can deliver competitive returns with substantially lower volatility.
The Bottom Line
The 60/40 mix of stocks and bonds have yielded superior returns in some markets but has some limitations as well. The turbulence in the markets over the past few decades has led a growing number of researchers and money managers to recommend a broader allocation of assets to achieve long-term growth with a reasonable level of risk.
FAQs
“You cannot invest in one future anymore; you have to invest in multiple futures,” Rice said. “The things that drove 60/40 portfolios to work are broken. The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore.
Why is the 40 60 balanced portfolio being challenged? ›
This diversification dynamic has been challenged by present market conditions. Stocks and bonds tend to bear a low or negative correlation during low inflation periods. In 2022, inflation and rising interest rates turned this relationship on its head and the 60/40 portfolio had its worst year since at least 1937.
What is the downside of a 60/40 portfolio? ›
Inflation is the biggest risk to a 60/40 portfolio because it can trigger central bank tightening which pushes up real rates, which weighs both on equities and bonds.
Is the 60/40 portfolio dead? ›
And this caused stocks and bonds to really move in tandem, which they don't always do, and to move downward big time. So, the 60/40 portfolio actually delivered considerable losses in 2022, and it led many industry commentators to proclaim that the 60/40 portfolio was dead.
Is 60/40 too aggressive for retirement? ›
“For most retirees, the 60/40 asset allocation mix represents a balance between the need for long-term return and meaningful protection from short-term market volatility risks,” said Peter Sullivan, a vice president and CFA at Segal Marco Advisors in Boston, in a message.
How often should you rebalance a 60 40 portfolio? ›
Vanguard's research paper on this subject suggests that, for most investors, rebalancing on an annual basis is adequate. “Whether it's 60/40 or another asset allocation, rebalancing will help make sure your portfolio is consistent with your risk tolerance,” Schlanger said.
What is the outlook for a 60 40 portfolio? ›
The outlook for 60:40 returns is challenging
The US-centric portfolio is expected to deliver an annualised total return of around 6.5% over the next 10 years, with the global portfolio slightly better at 6.8%.
What is replacing the 60/40 portfolio? ›
Once a mainstay of savvy investors, the 60/40 balanced portfolio no longer appears to be keeping up with today's market environment. Instead of allocating 60% broadly to stocks and 40% to bonds, many professionals now advocate for different weights and diversifying into even greater asset classes.
What is the 60 40 portfolio 4 rule? ›
By considering both average returns and unexpected events like the 1929 market crash, Bengen determined that a retirement portfolio made up of 60% equities and 40% fixed income assets should last over 30 years if you withdraw only 4% of the total amount annually.
Is 60/40 a good investment? ›
The classic 60/40 allocation is very intuitive. The 60% equity allocation provides the lion's share of the returns as a simple yet effective exposure to broad economic growth. And no one wants too much risk, so the 40% bond allocation is a simple way to diversify the portfolio and avoid excessive risk.
What Happens to My 401(k) If the Stock Market Crashes? If you are invested in stocks, those holdings will likely see their value fall. But if you have several years until you need your retirement account money, keep contributing, as you may be able to buy many stocks on sale.
Why 90 people lose money in stock market? ›
Overtrading To Cover Losses
In an attempt to recover losses quickly, traders often place more orders than usual or trade with higher volumes. This behaviour increases the risk and can lead to a vicious cycle of losses as it often involves making impulsive and poorly thought-out trades.
How many portfolio managers beat the S&P 500? ›
As a result, the percentage of actively-managed mutual funds that outperform the S&P 500 in any given year is only around 40%. And very few can consistently beat the market by enough every year to come out ahead in the long run.
What is the most aggressive mutual fund? ›
Here are the best Aggressive Allocation funds
- Meeder Dynamic Allocation Fund.
- JPMorgan Investor Growth Fund.
- TIAA-CREF Lifestyle Aggressive Gr Fund.
- Franklin Mutual Shares Fund.
- North Square Multi Strategy Fd.
- Gabelli Focused Growth and Inc Fd.
- E-Valuator Agrsv Growth(85%-99%)RMS Fund.
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
What is an aggressive retirement plan? ›
If all or almost all of your retirement account is in stocks or stock funds, it's aggressive. While having a more aggressive 401(k) can make a lot of sense if you have a long time until retirement, it can really sink you financially if you need the money in less than five years.
Is 60% stocks and 40% bonds a good mix? ›
The 60% equity allocation provides the lion's share of the returns as a simple yet effective exposure to broad economic growth. And no one wants too much risk, so the 40% bond allocation is a simple way to diversify the portfolio and avoid excessive risk. It's a beautifully simple story with historical credibility.
Why isn't the classic stock and bond investment strategy working? ›
When stocks have a bad year, bonds typically perform better, cushioning the blow. Not anymore. Some analysts say the crux of the portfolio's success—bonds' tendency to rise when stocks fall—generally happens when inflation and interest rates are relatively low.
What is the best portfolio balance by age? ›
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
