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Is the 60/40 portfolio really dead? How investors can shield their portfolios from post-pandemic volatility

·6 min read
Is the 60/40 portfolio really dead? How investors can shield their portfolios from post-pandemic volatility
Is the 60/40 portfolio really dead? How investors can shield their portfolios from post-pandemic volatility

Deciding on an investment strategy can be daunting in the best of circumstances.

In a pandemic, figuring out how much of your money to put into stocks, fixed-income assets and perhaps even Bitcoin — for those who like to play with fire — can be brain-bending.

The traditional 60/40 approach to investing, allocating 60% of your portfolio to stocks and 40% to bonds, has been a mainstay for Americans planning for their futures. The balance was designed to protect investors from potential losses in the equity markets by keeping more than one-third of their cash in bonds.

The global economy is struggling with rising inflation and it can lead to higher interest rates and potentially softer stock market returns. Bonds, too, may remain sluggish.

Amid the uncertainty, and with a plethora of new investment choices, many are looking beyond the traditional 60/40 portfolio structure in favor of a more modern approach.

“Clients are looking for ways to invest and earn money on their investments wildly differently than their parents' generation,” says Chris Karram, managing partner of SafeBridge Private Wealth in Toronto, Canada. “They’re not looking for the traditional walk into a bank, pull it off the product shelf and here’s your 60/40 portfolio.”

60/40 can work for some investors

To be sure, the 60/40 formula still has a place for investors seeking a more passive model — or those who get nervous every time the markets dip.

It’s a proven formula for someone who wants consistency, minimal risk and a “very vanilla financial model,” Karram says.

“It’s a middle-of-the-road, consistent long-term strategy that is not going to make you rich,” he says, “but you’re probably not going to lose all your money either.”

Still, some investment advisers have questioned the approach in today’s investing landscape, which looks a lot different than when the 60/40 rule was popularized decades ago.

They have good reasons. Back in 2000, investors with 10-year Treasury bonds generated about 6% on their money, providing a healthy balance and protection against stock volatility, in an investor’s portfolio. But last summer, the yield on the 10-year Treasury fell below 0.5%.

That has investors looking at other assets to replace that fixed-income component of their portfolios.

Alternative asset classes

Joel Clark, CEO and portfolio manager for wealth management firm KJ Harrison Investments in Toronto, Canada, says there are five main investments that can serve as alternatives to traditional stocks and bonds: private equity, venture capital, real estate, hedge funds and private credit.

Yet alternative assets have their own risks. And for those nearing retirement, managing risks and volatility is especially important because people are, in general, living longer and fewer of them can rely on employer-provided pensions to provide retirement income.

“People should have a base expectation that their portfolio needs to last them generally longer than originally planned,” Clark says, “and we’re going to have to get used to a bit more volatility because they’re going to be in asset classes that are much more sensitive than traditional, safer income streams.”

Thanks in large part to technology, the average investor has access to far more information and a wider variety of investing options than prior generations.

“The stuff that’s shaking the ground right now are ETFs [exchange traded funds], crypto, even real estate,” says Lesley-Anne Scorgie, founder of financial education organization MeVest. “That’s what people are talking about. They’re not talking about bonds anymore.”

Scorgie says investors should review their risk profiles every two years because of the market’s changing dynamics.

Financial advisers often assess risk profiles based on a set of questions about investors’ incomes, retirement or withdrawal timelines and behaviors around market fluctuations. Based on those answers, they’ll then take a bespoke approach to a client’s needs based on whether or not they can tolerate riskier investments.

If your appetite for risk is on the very low end, your portfolio should be predominantly fixed income investments, Scorgie says, adding, “The biggest mistake I see is where the risk profile is not being honored in the actual asset allocation in a portfolio.”

Diversification, inflation and timing

Alternative investments are not for everyone. Hedge funds, which can offer both diversification and greater returns, for example, are targeted toward wealthy investors.

Experts note hedge funds often invest in private companies, distressed debt, currencies and commodities and, for the most part, are not available directly to retail investors due to the varying risk profiles of these investments.

Wealth managers who offer these funds spend considerable time with clients to drill down on risk tolerance before placing capital in this asset class.

Real estate can also generate reliable income like a bond, but these days purchasing property in many parts of the U.S. can be cost prohibitive with average home prices now exceeding $500,000 in multiple areas.

“There’s always going to be the little bird on someone’s shoulder telling them to get in the real estate market,” Scorgie says. “But the way housing prices have gone it’s become less and less viable for people to buy into that asset class.”

There is an alternative, though. A real estate investment trust (REIT) lets investors purchase shares in companies that own and operate properties ranging from office buildings, hotels, apartments and even clusters of single-family homes.

Investors earn a share of the income produced from these real estate portfolios.

For the fearless, investing in cryptocurrency is highly volatile but has made millions — if just on paper — for sophisticated and even small-time investors who had good timing.

Over the past year, the price of Bitcoin has gone from over $60,000 in April 2021 to closing at as low as just over $28,000 on May 11 of this year. You need volatility tolerance to play in the cryptocurrency space.

Clark says much of the future investing climate will depend on what happens with inflation. While it seems to be heading up now, it could slow after the recovery.

“If you're in an inflationary environment, you want to own commodities and reopen stocks, whereas if you're in a deflationary environment you want to own bonds, gold,” Clark says. “And so you have to tilt your portfolio one way or another based on the environment you think you're going into.”

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— With files from Samantha Emann

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.