From World Headquarters
Is the 60/40 Portfolio Dead? Methinks Not.
Once upon a time in American finance the 60/40 portfolio was a kind of default allocation for institutional investors. 60% allocated to stocks and 40% allocated to bonds. Sometimes called a “balanced” portfolio. Back then it typically was limited to U.S. Blue Chip stocks and government and high quality corporate bonds. It served a purpose and was arguably better than a less formal approach to portfolio structure. At least once a week we get an unsolicited email pitch with the headline: “Is the 60/40 Portfolio Dead.” This pitch invariably comes from someone marketing an investment product that is esoteric, expensive, illiquid or all three. The first answer to the question is: absolutely not. However, the 60/40 portfolio is now much better than the 60/40 portfolio of yesteryear owing to the far greater possible exposure to multiple asset classes, global stocks, bonds and real estate and various subsets of all of the above: large, mid and small cap stocks, style exposures such as growth, value or high dividend yield stocks, emerging markets, high yield bonds, and more. In short, the allocation is potentially more broad and global, diversification is vast and costs have been wrung out of the best vehicle to access these market exposures: Exchange Traded Funds (ETFs) and their brethren, index-based mutual funds. The 60/40 portfolio is not only alive and well, it is far better than ever. What those raising the question are doing is hoping to make a case for alternative private assets: equity, credit, real estate, hedge funds, etc. This is a whole other universe of market exposures broadly characterized as illiquid, expensive, esoteric and with limited transparency. We are not going to expand on the merits of these investments here but we believe they need to meet a higher standard of prudence before they can even be considered. The restriction of how and who these investments can be marketed to was recently relaxed by the regulators so as always, the wholesalers come a knocking.’ The second answer to that question is: the 60/40 allocation is perfect for some investors, depending on their articulated goals and objectives and risk profile. We have some clients with a 90/10 asset mix, some with a 50/50 asset mix and everything in between. There is no single asset mix appropriate for all investors. As the man said, “there are many investment agendas in the naked city.” There is always however, the best asset mix of available asset classes, for any given return goal and risk tolerance. Harry Markowitz won the Nobel Prize (shared with Merton Miller and William Sharpe) in 1990 for his pioneering work in Modern Portfolio Theory (MPT). The summary below is generated by AI: His monumental contributions include: Risk vs. Return: His 1952 essay "Portfolio Selection" introduced a mathematical framework that demonstrated how investors could maximize expected returns while minimizing risk by carefully selecting a diverse mix of assets. [1] The Father of Modern Finance: Markowitz revolutionized how institutional investors and individuals measure risk, proving that the performance of an entire portfolio is more important than the performance of any individual stock. Central to this theory is the “Efficient Frontier.” It posits that there is an optimal “efficient” portfolio (asset mix) for any given return objective that minimizes overall portfolio risk, regardless of where it resides on the “frontier.” Investors should seek to maximize the return to risk tradeoff. As investment advisors that is what we do for our clients. So no, the 60/40 portfolio is not dead: it is just better. And so is the 100/0, 90/10, 80/20 and so on down the line. Would including some private assets in the mix enhance returns and/or limit risk? Maybe. That would have to be determined on a case by case basis. And access to asset classes and market exposures in the publicly traded markets has never been greater. As such, potential returns have never been greater and the risk management afforded by broad diversification and a global allocation has never been greater. Is the 60/40 Portfolio Dead? Methinks not.