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 as master limited partnerships, royalties, debt instruments from emerging 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 or exchange-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– a Teaching Professor at California Lutheran University and Managing Director of Investments, Institutional Consultant with Merrill Lynch & Co. in Century City, California – published a paper for 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 of rising 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
Does a 60 40 portfolio still make sense? ›
Before you abandon the 60/40 portfolio, consider this: From 1980 through July 2022, the 60/40 portfolio delivered positive returns in 35 of 42 years. That means investors who relied on this investment mix have seen their portfolios increase in value 83% of the time.
What is replacing the 60 40 portfolio? ›Other investment experts have suggested changing the portfolio allocation. Scott Ladner with Horizon Investments told CNBC that an 80/20 portfolio allocation could ultimately generate better returns.
What is better than the 60 40 portfolio? ›Investments such as private credit, real estate and infrastructure are more inflation-resilient, the report argued, and should provide better risk-adjusted returns over the long run. KKR found that the 40/30/30 portfolio outperformed a traditional 60/40 split by 2.6% over the 24-month period through June.
What is a downside of the commonly used 60 40 portfolio in asset wealth management? ›The Downsides of the 60/40 Portfolio
“The biggest disadvantage is that, over the long-term, a 60/40 portfolio will underperform an all-equity portfolio,” Johnson said. “And over very long time periods it will underperform by a significant amount because of the influence of compounding interest.”
For context, in the decade preceding 2022 (2011-2021), the classic 60/40 portfolio generated an impressive 11.0% annual return. Even after adjusting for inflation, its 8.7% annual real return stands above long-term levels of around 6%.
What is a good asset allocation for a 65 year old? ›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).
Is 60 40 still good? ›"The traditional 60/40 portfolio could still make sense for pre-retirees, but clients are advised to consider their risk tolerance, their overall financial health and their need for income from the portfolio to have a more thorough picture of whether the 60/40 mix makes sense for their financial goals," Shaw says.
Does Warren Buffett rebalance his portfolio? ›Hence, Buffett does not believe in rebalancing. In the context of a portfolio built for capital appreciation with a very long time horizon, such practice makes very little sense.
What is the best asset allocation now? ›Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses. Here's how 60/40 is supposed to work: In a good year on Wall Street, the 60% of your portfolio in stocks provides strong growth.
What is the most conservative investment portfolio? ›Money market funds. Treasury bills, notes, bonds and TIPS. Corporate bonds. Dividend-paying stocks.
Is a 30 stock portfolio too much? ›
Generally speaking, many sources say 20 to 30 stocks is an ideal range for most portfolios. It's important to strike a balance between investing in a diverse array of assets and ensuring that you have the time and resources to manage these investments.
What is a 70/30 portfolio? ›A 70/30 portfolio signifies that within your investments, 70 percent are allocated to stocks, with the remaining 30 percent invested in fixed-income instruments like bonds.
What is the outlook for 60 40 funds? ›Considering the improvements in equity and fixed income valuations over the course of 2022, Straehl's valuation models suggest that the 60/40 portfolio stands to deliver a return after inflation of 3.6% over the next two decades, a 1.6% improvement from a year ago.
What is the death of 60 40? ›60/40 is the conventional playbook for asset managers. It refers to the time-honored portfolio allocation of 60% equities and 40% fixed income. In this piece we explore what The Death of 60/40 means: In the current investment environment, this traditional strategy may be critically flawed over the next several years.
Is 60% stocks and 40% bonds a good mix? ›What's the 60/40 portfolio? With a 60/40 portfolio, investors put 60% of their money in stocks and 40% in bonds. This diversification of both growth and income has generally provided a safe, mundane way for investors to grow their money without taking on too much risk.
What is a realistic portfolio return? ›Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average.
What is considered a good portfolio return? ›According to conventional wisdom, an annual ROI of approximately 7% or greater is considered a good ROI for an investment in stocks. This is also about the average annual return of the S&P 500, accounting for inflation. Because this is an average, some years your return may be higher; some years they may be lower.
What portfolio should earn the highest average annual return? ›The U.S. stock market is considered to offer the highest investment returns over time. Higher returns, however, come with higher risk. Stock prices typically are more volatile than bond prices. Stock prices over shorter time periods are more volatile than stock prices over longer time periods.
What percentage of my portfolio should be cash right now? ›A common-sense strategy may be to allocate no less than 5% of your portfolio to cash, and many prudent professionals may prefer to keep between 10% and 20% on hand. Evidence indicates that the maximum risk/return trade-off occurs somewhere around this level of cash allocation.
What percentage of retirement portfolio should be real estate? ›Johnson said his research found that a mixture of stocks, bonds, and real estate will outperform other portfolios. His optimal mix in a retirement portfolio: 50 percent real estate, 30 percent stock, and 20 percent bonds, a formula he said would be sufficiently diversified to provide stability in retirement.