Does 60/40 asset allocation still work?


The year was difficult for the stock and bond markets.

With inflation at record highs, sharp reversals in monetary policy, and a perfect storm of events driving prices down, it’s understandable that investors want to make sure their investment strategy is right for the times.

Indeed, it is particularly in times of volatility that advisors can help investors see the big picture and stay focused on their long-term goals. We think it’s clear that a well-established approach to asset allocation – in which a balanced, risk-adjusted portfolio of stocks and bonds is held for the long term at a low cost – continues to do well. serve investors.

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Equity-bond diversification in the historical context

Some investors were confused by the simultaneous decline in stock and bond prices during the year. In fact, brief and simultaneous declines in stocks and bonds are not unusual, as our chart shows.

Considered monthly since the beginning of 1995, in sterling terms, the nominal total returns for global equities and investment-grade bonds have been negative about 13% of the time. It’s a month of joint declines a little more every seven months or so, on average.

Historically, once the market has had time to adjust, the negative correlation between bonds and equities has returned within a few months. Our analysis of recent prolonged market downturns suggests that the longer a crisis drags on, the more likely bonds are to play a stabilizing role.

Leaps as ballast

This is particularly important because the primary role of bonds in an investment portfolio is not to generate returns but to act as a stabilizer. We are cautious about offering alternatives to investment grade bonds as the main counterweight to equities in a balanced portfolio.

Asset classes such as real estate introduce cost and liquidity issues. Sectors such as commodities and high-yield debt can help hedge unexpected inflation, but exhibit similar behaviors to equities.

Hedging strategies such as put options introduce complexity, while remaining exposed to significant downside. That’s not to say there isn’t an investment case for these approaches in particular circumstances. On the contrary, there is no convincing substitute for the advantages offered by high quality fixed income securities in terms of diversification, transparency, relative simplicity and cost.

Likewise, long-term investors are unlikely to be able to preserve returns simply by exiting the market. Short-term market timing is extremely difficult even for professional investors and, in our view, is doomed to failure as a portfolio strategy.

Markets are incredibly good at quickly pricing in unexpected news and shocks, such as the invasion of Ukraine or the central bank’s accelerated and synchronized response to global inflation. Chasing performance and reacting to headlines tends not to work in the long run, as it often boils down to buying high and selling low.

What could the future hold for us?

It’s also important to remember that with the painful market adjustments since the start of the year, the return outlook for the 60/40 portfolio has improved.


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