Recent events in the global economy, geopolitics, and market raised a question about the traditional 60/40 portfolio and speculated whether investors should try other investment strategies or not.
This conventional strategy allocates 60% to stocks and 40% to bonds to carry a moderate level of risk. The logic is that when stocks do insufficiently, bonds serve as a ballast since they often don’t move together.
In today’s article, we will seek an answer to whether the 60/40 portfolio is dead. To do so, we will cover:
- What is a 60/40 portfolio?
- Why do some experts think this strategy is outdated while others believe it’s not?
- How is inflation connected to the 60/40 method?
- What is the best investment alternative?
Let’s dive in!
What Is a 60/40 Portfolio?
The 60/40 balanced portfolio is a widely regarded and traditional way of structuring a portfolio.
Due to the recent fall of the stocks and bonds in 2022, many investors want to give up on the 60/40. On the other hand, many investors believe that the long-term prospects of a 60/40 traditional balanced portfolio will likely be reasonably robust.
The 60/40 method is sometimes referred to as the ‘set it and forget it portfolio’ because people invest 60% of their long-term assets in stocks, usually a diversified index portfolio, and the other 40% in bonds.
History shows that stocks have attractive long-term returns but can come with significant short-term value fluctuations. Due to these fluctuations, many investors have second thoughts about stocks.
On the other hand, bond returns are lesser in the long term but can bring stability and safety to a portfolio. Bonds are subject to interest rates, prices, and credit risks. Prices tend to be vice versa, affected by changes in interest rates.
So, with 60/40, people have an opportunity to get the best from both – the long-term attractiveness of stocks and help with the risk level of bonds.
This year, none of the investment strategies seem to work; 60/40 is no exception. However, the 60/40 has seen less value loss than other portfolio construction methods.
Bonds have held up better than stocks, so the 60/40 did better than portfolios that are more invested in stocks. In addition, a diversified portfolio of stocks, as the 60/40 generally implies, has proved less risky compared to more exposed investment bets.
Portfolios with large allocations to the specific asset class (like crypto, growth stocks, or tech stocks) have had a devastating year. On the other hand, the balanced exposure of the 60/40 has shown better. Even with the smaller positive returns.
Let’s look at the prospects of the 60/40.
Bonds can be reasonably easy to forecast because the high-quality portfolios’ returns are equal to their current yield if the investor holds to maturity.
At the beginning of the year, people broadly expected a 1.5% return with a 10-year U.S. Treasury for a decade. At current levels, they might expect a shade under 3%.
So, average returns to high-quality intermediate fixed income have doubled. This implies that long-term prospects for certain fixed-income assets are much better than they were a few months ago. Many people highlight that past performance is not a reliable indicator of future results.
With stocks, it is more complicated to build robust predictions. However, valuations are returning to more normal levels, which offers the possibility of more reasonable returns over the future decade. And it’s the same as with bonds – we couldn’t undoubtedly say that six months ago.
Is the 60/40 Portfolio Dead?
The 60/40 was designed almost 70 years ago. Many people point out that a lot has changed since and that this strategy isn’t relevant anymore. Let’s see why they think that.
Reasons Why People Think the 60/40 Is Outdated
We all have witnessed that stock valuations have become untenable. On top of that, inflation is at its highest level in 30 years and is expected to increase rates gradually in the years ahead.
Therefore, it’s not strange that most investors believe it won’t be the kind of returns we’ve seen in the public markets over the past ten years.
As a solution, they suggest illiquid assets or alternative investments, like real estate, private debt, equity markets, hedge funds, and venture capital.
These alternative asset classes support the benefit of diversification (which is why investors remain in fixed income) and low correlation to stocks. A telling characteristic check is low correlations to other broad asset classes in your portfolio, like high-yield bonds, global equities, and private markets.
Financial advisors who think that the 60/40 strategy is dead also suggest that these alternative assets must be done in combination with cash-flow planning.
Illiquid assets can’t be liquidated or quickly sold, so they are not for everyone. An alternative investment is a good option for high-net-worth and affluent investors because they need cash in the short term and are often willing to take on temporary illiquidity.
They also point out that private markets are more attractive than stocks. Besides generating returns, these alternatives provide better options for building generational wealth.
Real Estate As An Example
Some experts advise using real estate as a fixed-income supplement as an investment vehicle to boost yield for investors with lower risk tolerance. It also provides a hard asset that presents a possibility for real income.
Venture capital and private equity are proposed for investors who are okay with taking more risks and aren’t looking for income immediately.
When you have more time, it is wise to allocate a small portion of a portfolio to early-stage venture capital. This way can provide a potential for more growth than stocks, especially as companies remain private for more extended and go public at higher valuations. Investing in early- and late-stage (pre-IPO) companies are more beneficial.
People who state that the 60/40 is dead also suggest investing through a financial advisor with access to an experienced team connected to investment opportunities in venture capital and private equity.
This is because information about private investment companies is not usually available to the public. With help from a financial advisor, an investor can determine in every individual case whether private equity or venture capital investment is right for them.
They highlight the importance of having a personalized investment strategy to get the best out of it. They think there is no universal approach to investing, and a good financial advisor will customize their client’s portfolio with their risk tolerance and time horizon.
This is, of course, the subject of debate because some people think there are types of investment vehicles and strategies that work for everyone and don’t require financial advisors.
According to experts who believe the 60/40 strategy is outdated, scale is the crucial reason for thinking that. Financial advisors often assemble their clients into liquid model portfolios because it’s more convenient for them to scale without customization based on individual clients’ finance, financial needs, and goals.
They argue that a trend is bubbling in the wealth management industry in which companies try to collect as many assets as possible. They want to put the investment side on automatic so they can spend their time on growth or a sale.
So, their verdict is that you should give up the traditional approach to allocation and work toward your portfolio tailored to your aspirations and goals.
There is a good point. However, let’s see the other side as well.
Why do Some Experts think the 60/40 Portfolio Isn’t Dead?
According to Allan Roth, one of the best financial planners, the 60/40 ”is stressed, but it’s not dead.” People who agree with this reasoning believe that list of other good options is slim, and this is when most asset classes are getting hammered.
Most of them think that since there is a list of inconvenient possibilities, we should choose the least inconvenient one, therefore, the 60/40 asset allocation. A simple mix of 60% US large cap stocks and 40% investment-grade bonds would have likely satisfied most investors.
However, they still have an open mind about adjusting this asset allocation. They say investors may need to modify their approach. Before that, they must revisit their overall financial situation and allocation; there is a chance that 60/40 isn’t right for them.
How can you tell if it is the right one? It depends on many factors, such as an investor’s financial goals, retirement plans, life expectancy, comfort with volatility, willingness to pull back on that spending when the market value goes haywire and much more.
They highlight that bonds have moved similarly to stocks this year. So, it wouldn’t be wise for investors to abandon them. Bonds still have some fantastic benefits for lowering the risk.
In the past year, the correlation of bonds to stocks increased to about 0.6%. It is still relatively low compared with other equity asset classes and asset-backed securities. A correlation of 1 means the assets track each other, while zero refers to no relationship, and a negative correlation connotes they move opposite.
Back in 2000, the stocks and bonds correlation had mainly been negative. In 2022 the S&P 500 Index is down 21%, and the Bloomberg U.S. Aggregate bond index is down 11%. So, they think it’s likely to work in the long term. ”High-quality bonds are a lot less volatile than stocks,” says Roth. Past performance doesn’t guarantee future results, which may fluctuate.
They compare diversification to an insurance policy. The current market conditions have also shown the value of a broader investment diversification with a stocks and bonds mix. Our statements concerning financial market trends are based on that conditions, but they fluctuate quickly.
For example, adding diversification within stocks and bonds categories on a 60/40 method yielded an overall loss of about 13.9% this year, which is an improvement on the 17.6% loss from the classic version incorporating U.S. stocks and investment-grade bonds.
It’s compared to a life insurance policy because diversification has a cost and may not always pay off, but people are glad they have it when it does.
The financial markets have been indeed affected this year. The surprisingly stubborn inflation is forcing the Fed to raise interest rates at the most rapid pace in decades, beating a swift retreat from the easy-money policy of the pandemic that promoted bonds and equities.
Due to that, the near-term environment for stocks and bonds could continue to be complicated.
Regarding a recession, stocks tend to suffer due to less economic growth. At the same time, bonds can rally because U.S. Federal Reserve usually cuts interest rates to support the economy. If the interest rates are cut, bond yields drop, and bond prices go up.
According to experts who believe 60/40 asset allocations aren’t dead, it’s a helpful benchmark for an investment strategy that pursues moderate growth.
Even though the 60/40 is prominent and valuable, it is not magical. They think talking about its demise is a distraction from the business of investing over the long term.
The broader and more critical issue is the effectiveness of a diversified portfolio, balanced across asset classes, in protecting investors’ risk tolerance and time horizon. In that context, 60/40 is a shorthand for an investor’s strategic asset allocation, whatever the target mix.
For investors with a longer time horizon, the perfect asset allocation mix may be more aggressive, 80/20 or even 90/10.
On the other hand, for people who are closer to retirement or more conservative-minded, 30/70 portfolio construction may be the right fit.
The suitability of alternative investments for a portfolio depends on every investor. If you’re unsure what would be the best for you, consider asking a financial advisor for investment advice.
Whatever a target asset mix is, and what it includes in the portfolio, the crucial thing for successful investing over the long term requires long-term discipline and perspective.
They are aware that this is not the first, and probably not the last, time that the 60/40 (and markets in general) has faced difficulties. Their financial advice is that further economic travails lie ahead and that market returns will still be muted. However, they believe that the 60/40 portfolio and its variations are not outdated.
They predict that it will be reborn from the ashes of this market, just like the phoenix. And this strategy will continue to reward investors with the patience and discipline to stick with it.
According to Steve Chiavarone, portfolio manager at Federated Hermes: ”The anti-60/40 thing is nonsense. Every time we had a major growth scare over the last year, you’ve seen the 10-year Treasury yield rally.
The Best Investment Alternative
Nobody can answer whether you should try the 60/40 strategy or not; it’s up to you. However, we can tell you what we think is the best alternative investment and why. And the best investment strategy is the Infinite Banking Concept.
Infinite Banking Concept
Traditional banking leads to financial problems because of its high-interest rates and dependence on them.
That’s why Nelson Nash created the Infinite Banking Concept in the 1980s – he wanted to break the chains of reliance on banking institutions and help us become our own bankers who can work forward and achieve their own individual, unique financial goals.
The best financial tool for Infinite Banking Concept (also called over-funded life insurance) is a whole life insurance policy. It’s important to understand that it’s not the same thing!
A whole life policy is perfect for over-funded life insurance because it has the cash value component. You can access that cash anytime and use it for whatever reason – investment opportunities, pension funds, emergency expenses, tuition, family vacation, you name it.
Your policy’s cash value is the amount of the death benefit the insurance company is liquid to you. So, your ”bank” consists of a portion of premiums paid (money from you) + guaranteed interest earned + potential dividends (money from the insurance company). This process is so straightforward that you don’t need a financial advisor.
You save money in a dividend-paying whole life insurance policy where cash grows tax-free with a higher return rate than a traditional bank account with minimal returns.
Advantages of Infinite Banking Concept
This strategy is the best way to control your money and eliminate unnecessary money leaks from your economy. Instead, you utilize your money to grow and increase your assets.
Cash flow improvement is one of the biggest advantages, especially in times of uncertainty. There is no need to go through the complicated process of a traditional bank to get a loan. Instead, you request a policy loan from your insurer, and they make funds available to you.
Whole life is a highly liquid asset compared to other financial instruments like stocks, bonds, real estate, mutual funds, exchange-traded funds, or even qualified plans like 401(k) and IRA.
Due to its liquidity, a whole life policy is a valuable part of a financial foundation that can act like emergency savings.
It’s a shallow risk and offers you a great deal of control. The control overfunded life insurance offers can be categorized into two groups: tax advantages and asset class protections.
With this investment method, you have tax-free policy loans, tax-free growth of interest and dividends inside the policy, and the death benefit is tax-free for your beneficiaries. Additionally, unlike other investment vehicles, you can easily predict your future results.
Protection Against Volatility
Another crucial reason we think this is the best option for most people at any time because a whole-life policy is a non-correlated asset. Regardless of what happens in the market conditions, your policy retains its worth. It is especially beneficial during high inflation (as an inflation hedge) or recession.
The 60/40 method has yielded superior returns in some markets but has some limitations. The turbulence in the past few decades has led many financial advisors and money managers to recommend a broader allocation of assets or to quit this strategy.
We want to play safe and ensure the best possible personal finance for investing. There is no need for unnecessary risks, and with portfolio allocation, it’s uncertain whether particular asset distribution or a mix of funds will meet your investment objectives and support you with a given income level.
Is this method dead or not isn’t the crucial question after all. The vital question is whether the 60/40 strategy can help you achieve your goals or not. And we think that it would be easier to seek other investments.