Finance

Inflation and rising interest rates have stressed the 60/40 investment portfolio strategy — ‘but it’s not dead,’ says financial advisor

How a 60/40 portfolio strategy works

The strategy allocates 60% to stocks and 40% to bonds — a traditional portfolio that carries a moderate level of risk.

More generally, “60/40” is a shorthand for the broader theme of investment diversification. The thinking is: When stocks (the growth engine of a portfolio) do poorly, bonds serve as a ballast since they often don’t move in tandem.

The classic 60/40 mix encompasses U.S. stocks and investment-grade bonds (like U.S. Treasury bonds and high-quality corporate debt), said Amy Arnott, a portfolio strategist for Morningstar.

Market conditions have stressed the 60/40 mix

U.S. stocks have responded by plunging into a bear market, while bonds have also sunk to a degree unseen in many years.

As a result, the 60/40 portfolio is struggling: It was down 17.6% this year through June 22, according to Arnott.

If it holds, that performance would rank only behind two Depression-era downturns, in 1931 and 1937, that saw losses topping 20%, according to an analysis of historical annual 60/40 returns by Ben Carlson, the director of institutional asset management at Ritholtz Wealth Management.

‘There’s still no better alternative’

Of course, the year isn’t over yet; and it’s impossible to predict if (and how) things will get better or worse from here.

And the list of other good options is slim, at a time when most asset classes are getting hammered, according to financial advisors.

If you’re in cash right now, you’re losing 8.5% a year.

Jeffrey Levine

chief planning officer at Buckingham Wealth Partners

“Fine, so you think the 60/40 portfolio is dead,” said Jeffrey Levine, a CFP and chief planning officer at Buckingham Wealth Partners. “If you’re a long-term investor, what else are you going to do with your money?

“If you’re in cash right now, you’re losing 8.5% a year,” he added.

“There’s still no better alternative,” said Levine, who’s based in St. Louis. “When you’re faced with a list of inconvenient options, you choose the least inconvenient ones.”

Investors may need to recalibrate their approach

While the 60/40 portfolio may not be obsolete, investors may need to recalibrate their approach, according to experts.

“It’s not just the 60/40, but what’s in the 60/40” that’s also important, Levine said.

But first, investors ought to revisit their overall asset allocation. Maybe 60/40 — a middle-of-the-road, not overly conservative or aggressive strategy — isn’t right for you.

Determining the right one depends on many factors that toggle between the emotional and the mathematical, such as your financial goals, when you plan to retire, life expectancy, your comfort with volatility, how much you aim to spend in retirement and your willingness to pull back on that spending when the market goes haywire, Levine said.

Diversification ‘is like an insurance policy’

The current market has also demonstrated the value of broader investment diversification within the stock-bond mix, said Arnott.

For example, adding diversification within stock and bond categories on a 60/40 strategy yielded an overall loss of about 13.9% this year through June 22, an improvement on the 17.6% loss from the classic version incorporating U.S. stocks and investment-grade bonds, according to Arnott.

(Arnott’s more diversified test portfolio allocated 20% each to large-cap U.S. stocks and investment-grade bonds; 10% each to developed-market and emerging-market stocks, global bonds and high-yield bonds; and 5% each to small-cap stocks, commodities, gold, and real-estate investment trusts.)

“We haven’t seen those [diversification] benefits for years,” she said. Diversification “is like an insurance policy, in the sense that it has a cost and may not always pay off.

“But when it does, you’re probably glad you had it, Arnott added.

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