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Is the Standard 60/40 Investment Portfolio Dead? - Episode 10

The investment landscape has greatly changed since the 1980s.  Economic and societal change along with longer life expectancies are leading to recommendations of a greater allocation to equities if the client's risk tolerance will allow for it.  This week I summarize a recent MarketWatch.com article about Bank of America's announcement regarding the end of the 60/40 portfolio.

Listen to Episode 10 Here


You can listen online through the direct player above, or a much easier way to listen is by subscribing to the podcast through a free podcast app on your phone.  The podcast is available on iTunes, Spotify, TuneIn Radio, Google Play Music and Stitcher


The 1980s

"Why isn’t my bank paying out higher interest?  Why can’t I get a 6% CD anymore? "  People still think they should get higher rates on their bank accounts and CDs.

"Why is the fed is keeping rates low?  In my day you could get 9% on a bank account."  Well, you were also paying 20% on a mortgage.

Do you also want the metal hair bands back?  

The 80s weren’t all bad.  They had some good movies: the Indiana Jones movies, Back to the Future, the Goonies, ET, some of the original Star Wars. And who could forget the bravado battles between Schwarzenegger, Stallone and Bruce Willis with their Predator and Commando movies, Rambo and Rocky movies and, of course, the Die Hard  movies.

Some good stuff did come out of the 80s, but let’s just leave it there.  The 80s also gave us Howard the Duck and the mullet!  Thank God I was too young for that fad. But my brother wasn't!  We can’t change it, even if we wanted to.  

The Current Time

Inflation is 2%, and even after a huge tax cut, economic growth was only temporarily boosted a couple of quarters and has dropped back down to the 2% range it was before.  

Technology advancements and the slowing demographic growth are likely to keep rates low into the foreseeable future.

Now, Bank of America is even calling "'the end of the 60/40' standard portfolio." 

The 60/40 Portfolio 

From Chris Matthews of MarketWatch.com

"Investors have long been told that the ideal portfolio should carry 60% of its holdings in equities and 40% in bonds, a mix that provides greater exposure to historically superior stock returns, while also granting the diversification benefits and lower risk of fixed-income investments. 

But in a research note published by Bank of America Securities titled “The End of 60/40,” portfolio strategists Derek Harris and Jared Woodard argue that “there are good reasons to reconsider the role of bonds in your portfolio,” and to allocate a greater share toward equities."

"There are now 1,100 global stocks that are paying dividends above the average yield of global government bonds." (I covered this in a previous podcast: Why Are Interest Rates So Low?  A Slow Growth World.)

"As global economic growth slows and populations in developed-market economies age, traditionally safer assets like bonds have grown in popularity and helped create a “bubble” in the bond market that threatens to derail returns for investors who maintain a typical 60-40 split, according to the B. of A. analysis."

“The core premise of every 60/40 portfolio is that bonds can hedge against risks to growth and equities can hedge against inflation; their returns are negatively correlated.” “But this assumption was only true over the past two decades and was mostly false over the prior 65 years.

The big risk is that the correlation could flip, and now the longest period of negative correlation in history is coming to an end as policy makers jolt markets with attempts to boost growth.”

"Instead of U.S. government debt, the authors advise investors to add more exposure to equities, particularly stocks with high dividend yields in underperforming sectors, including financials, industrials and materials, which can be bought at inexpensive valuations." (As I’ve also covered before, the inexpensive valuations are more important than the dividend yield.)

“The future of asset allocation may look radically different from the recent past, and it is time to start planning for what comes after the end of 60/40.”

The bottom line:  Times, they are a changin', and the investment landscape is changing too!  Economic and societal change along with longer life expectancies are leading to recommendations of a greater allocation to equities if the client's risk tolerance will allow for it.  

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