Why 60/40 Portfolios Are In A Slump

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Source: Stock.Adobe.com

As a big baseball fan, this is the time of year when it is pretty easy to see which players are “slumping.”  It is also the point in the season where you start to realize that for some players, their poor start is not a mirage.  Rather, there is something deeper that is wrong.  But enough about baseball.

One of the most dominant investment approaches of our time is a well-crafted marketing pitch used by many on Wall Street.  It is called the “60/40” portfolio.  By that, the broker or advisor means that 60% of your assets are invested in stocks, and 40% are invested in bonds.  It makes investing simpler to understand, eliminates all of those nasty detail questions (like “is this really the best thing for me, or the best thing for you?”), and makes the sale easier.  With that, the broker can move on to the other 10 people they need to sell this over-simplified, excessively aggressive strategy to.

Sure, I may sound bitter.  Here’s why: while 60/40 portfolios have had a good run for a while, the likelihood of a repeat performance is unlikely in the years ahead.  Bond rates are too low, and stocks are near all-time highs.  That is a toxic combination not seen since the 1970s, way before 60/40 was a way for investment firms to build scale in their businesses, by herding people into a unified asset allocation…that for many, is not at all appropriate.

I have discussed this issue in recent articles, so I will not continue on with that.  Instead, I will simply show you a recent “behind the numbers” look at why 60/40 portfolios are not all they are cracked up to be.  In fact, cracking is what they are doing right now, as you read this.

Here is a fund that represents a global allocation to stocks and bonds (in blue) and a 60/40 domestic U.S. portfolio I created (in orange).  This looks at the past 5 years since last Friday.  As it is, the returns are solid with the U.S.-only version checking in at around 6% a year, and the Global version around 4% per year (plus compounding).

Source: YCharts.com

Now, here is where the bloom falls off the rose, so to speak.  This is the period from 2/12/16 – 1/26/18, or about 2 years of that past 5-year period I showed you above.  As you can see, nearly all of the U.S. 60/40 portfolio’s returns were earned during this time.  The other 3 years out of 5?  Practically nothing.

What’s more, the Global 60/40 portfolio gained about the same as the U.S. version during this 2-year period.  That means that over the other 3 years, it was DOWN about 12%.

Source:YCharts.com

Investment returns in the future are likely to be below those of the past 10 years, as we will not be coming out of the worst economic conditions since the Great Depression (or at least, let’s hope not).

That’s why successful investment strategy means going way beyond the cookie-cutter, mass-appeal, buzzword-laden approach that continues to invade the portfolios of trusting, unsuspecting investors.  For some, 60/40 may be a good fit.  For many, it is a poor excuse for “investment advisory.”  Investors should look beyond the headlines, and make sure they are not being shoehorned into something that is not really in their best interests.

Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors

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