This article first appeared in the Telegraph
JAMES Goldsmith famously quipped that if you see a bandwagon it’s too late. He was right. One of the truisms of investment is that when everyone is talking about something, the moment has passed. That something at the moment may be the death of the 60/40 portfolio.
For those with better things to do than immerse themselves in investment jargon, a quick explainer. 60/40 is shorthand for a balanced portfolio that invests roughly 60% of its assets in shares and 40% in bonds. The reason for the weighting towards shares is that over time that’s where the growth is; the 40% in bonds is enough to offset the volatility of the stock market but not so much that it gets in the way of shares’ long-run outperformance.
That’s the theory. How has it worked? Extremely well for long periods of time, which is why financial advisers have loved it. The performance of a 60/40 portfolio has marginally underperformed a pure equity investment but with something like 40% less volatility. That’s a great combination for an investor. Decent returns and undisturbed sleep.
And how has it achieved this alchemy? Quite simply because most of the time shares and bonds move in opposite directions. If things are going well, shares rise in value and bonds fall. When things get tougher, shares might fall but bonds will go the other way, because interest rates and bond yields tend to fall in recessions. Bond prices rise when bond yields fall.
So why are people now talking about the demise of the 60/40 portfolio? Principally because investors no longer believe that bonds and equities will move in different directions for the foreseeable future. Because shares have risen a long way since the financial crisis, they are now quite highly valued by historic standards. And because bond yields have fallen pretty steadily over the past 40 years or so, they too are expensive versus history.
Add to that today’s high and rising inflation…
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