The 60/40 portfolio, also known as the 60/40 asset allocation, has been typically understood in financial planning and investment circles as a method to balance risk while promoting growth. The strategy is that stock investments make up 60%, while bonds make up the remaining portion. With this combination, it’s been thought that stock holdings could grow, over time, while bonds might provide a cushion during economic downturns.
But since the beginning of 2022, articles and experts have been questioning the success of the 60/40 investment strategy, mainly due to inflation and interest rate hikes. Bloomberg.com, for one, claimed in March 2022 that neither stocks nor bonds are doing well in the current economic environment. While experts quoted in the article didn’t put the death knell on the 60/40 strategy, they did suggest that a strategy to add other assets might help a portfolio stand up to increasing inflation.
Within the past year, other business articles and experts have weighed in on potential updates to the 60/40 investment strategy.
Adding Alternatives
Some experts note that turning to alternative assets might create more portfolio balance. For example, a Kiplinger newsletter suggested a 33/33/33 allocation, which divides a portfolio into stocks, bonds, and alternative assets or illiquid assets. Alternative assets are in a catch-all category for anything outside of stocks are bonds, and can include real estate, private equity, commodities, and hedge funds.
FarmTogether’s Artem Milinchuk listed other types of alternative assets in a 2021 Forbes article; these included precious metals, commodities, and even farmland. A SeekingAlpha write-up also supported the idea of adding farmland to portfolios, along with other real assets including apartments, distribution centers, and grocery anchored centers.
Changing Allocations
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. He suggested adding low-volatility exchange-traded funds (ETFs) or derivatives from ETFs that rely on covered call options or put-spread collars.
Also leading the charge toward changing allocations is Andrew Burish with UBS, who would like a 45%-25%-30% allocation. He told Barrons that with this strategy, 45% of a portfolio consists of U.S. and foreign equities, 25% holds short-duration fixed-income assets, and 30% is made up of alternative investments.
Meanwhile, Neil Azous with Rareview Capital suggested keeping the allocation, but changing the types of investments within those categories. In an interview with U.S. News, Azous suggested that the 40% portion, typically consisting of nominal bonds, should be replaced with inflation-linked bonds or alternatives like break-even inflation instruments.
Staying the Course
Then again, many investors are deciding to stick with their 60/40 investment strategy. Going back to Bloomberg, a more recent article quoted results from an MLIV Pulse survey indicating that the majority of investors view the 60/40 portfolio as “a viable strategy for delivering returns that exceed inflation over the next decade.” The article also said that many investors surveyed don’t want to reposition what they have.
Other experts, like Roger Aliag-Diaz with Vanguard, point out that economic hiccups tend to bring out those who claim that the 60/40 allocation is dead and gone. “Based on history,” he wrote, “balanced portfolios are apt to prove the naysayers wrong again.”
The Value of a Financial Planner
There’s little doubt that the current economic situation is generating a plethora of information about the right kind of portfolio, the best asset types, and potentially higher-return allocation strategies. The answer is that there really is no right answer. All situations are unique. As such, when it comes to questions about portfolio allocation or investment classes, it’s a good idea to work with a qualified financial planner.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Neither asset allocation nor diversification guarantee a profit or protect against loss in a declining market. They are methods used to help manage investment risk.
Rebalancing can entail transaction costs and tax consequences that should be considered when determining a rebalancing strategy.
Past performance is not a guarantee of future results. All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
