The attraction of a diversified investment approach is that that negative swings for both equities and bonds have typically been brief.
High-quality bonds such as Treasuries have less volatility than equities and usually appreciate in value when risk assets are falling sharply. In turn, equities generate the bulk of returns over time as companies have consistently grown their earnings outside of recessions.
For much of the past decade, a robust performance from owning a 60/40 portfolio has reflected a climate of very low inflation, limited rises in bond yields, and an advancing stock market. That has resulted in a tough environment for generating future returns as both equity and bond valuations ended 2021 at lofty levels.
A New Approach?
Before this month’s appreciable decline in 60/40 performance, investors had been exploring ways to shift away from that approach. Some have advocated downgrading the bond component as high-quality fixed-rate yields are less than the current inflation rate, eroding the purchasing power of the returns.
A shift away from expensive U.S. large cap shares toward those of smaller and lower-valued companies in global markets — such as the U.K., Europe and the developing world — have also been recommended.
Another approach has been tying up money for extended periods in the booming private debt markets, in an effort to find assets that are less correlated with those of publicly traded shares and bonds.
“Our approach to 60/40 strategies is looking more at owning dividend paying stocks and also allocating more to alternatives, while underweighting bonds,” said Anthony Saglimbene, global market strategist at Ameriprise Financial.
Citigroup Inc. strategist Alex Saunders wrote in a note last week that adjusting portfolios when growth slows and inflation stays high by “reallocating a 60/40 portfolio to real-estate, CTA, quality equity and carry strategies we find delivers similar returns with less volatility and a more robust performance across regimes.”