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Alternatives To The 60 / 40 Portfolio
The next 10 years are likely to be very different from the last 10 years .
By Tony Davidow
IN The LAsT CoUpLe oF yeARs , TheRe hAve been many proclamations declaring the “ death of the 60 / 40 portfolio .” The results in the first half of the year have prompted those declarations to proliferate , with stocks down 20 % and bonds down over 10 %— the 60 / 40 portfolio was off 16.9 % through June 30 . so why the fascination with the 60 / 40 portfolio , and if it is really dead — what ’ s next ?
Following the lead of many institutions , the wealth management community began to focus on the 60 / 40 portfolio as a market proxy in the 1990s . This naïve benchmark provided a way to compare diversified portfolios , and it was easy to increase the equity allocation for aggressive investors ( 70 / 30 ) or decrease the allocation for conservative investors ( 50 / 50 ).
The expectation was that the 60 % equity allocation would provide the growth in the portfolio , while the 40 % bond allocation provided income . Together , investors got some level of diversification because stocks and bonds reacted to different fundamentals . The 60 / 40 portfolio worked well during the latest bull market , where U . s . equity returns soared to new highs , fueled by easy money and a zero-interest policy .
Today ’ s Market
After the longest bull market in history ( 2009-2020 ), the next 10 years are likely to be very different than the last 10 years . The easy fiscal and monetary policy served as an accelerant for the U . s . markets , pushing up stock prices without regard for valuations . With the strong U . s . market characterized by slow growth , low fixed-income yields and challenging economic conditions abroad , investors adopted a TINA ( there is no alternative ) approach to investing .
Today , we are dealing with the residual effects of the global pandemic , the Russian invasion of Ukraine , changing Fed policy , and record levels of inflation . The bottom line is the current market environment presents several challenges for advisors and investors — lower equity returns , low yields , elevated correlations , increasing bouts of volatility , and record inflation not seen since the early 1980s . Let ’ s examine more closely and consider the responses . Equity returns . The pandemic exposed supply-chain issues and an unhealthy dependence on certain countries for valuable resources ( Russia , China , etc .). Companies have been impacted by supply access issues , rising costs , challenges in hiring people , and lagging revenues .
Takeaway . Many strategists are predicting substantially lower equity returns over the next 10-15 years .
Potential solutions : Private equity , real estate , event-driven and long-short hedge funds .
Fixed income . After the Great Financial Crisis , many countries began to offer negative-yielding debt . The Fed and other central
38 | financial advisor magazine | september 2022 www . fa-mag . com