The 60/40 portfolio is one of those bits of investment philosophy that’s so deeply ingrained, many people take it for granted. It ranks right up there with “buy low, sell high” for investment advice that’s accepted without question… and it’s about as useful (in other words, not very).
But we’re starting to see that change. Between the financial crisis highlighting the risk in stocks, and the Fed’s “low interest rates forever” policy depressing the returns in a traditional bond portfolio, the 60/40 portfolio is finally on the verge of losing its status as an unchallenged truth of investing. Via Market Watch:
To replace the strategy, some financial professionals are turning to alternative investments—like commodities, foreign currencies, real estate or even private equity—that weren’t easily accessible or widely used when 60-40 method became popular. “Today’s tool kit is better,” says Steve Blumenthal, founder of CMG Capital Management in Philadelphia.
The conundrum is that there now are seemingly as many approaches to asset allocation as investment managers. Some experts advocate the “permanent portfolio” approach, developed by the late investment analyst Harry Browne, which splits money evenly among four asset classes: U.S. stocks, long-term U.S. Treasury bonds, precious metals and cash…
Mr. Blumenthal advocates an even split among three buckets: stocks, bonds and a final grouping he calls “tactical and alternative,” meaning it blends alternative and other investments and can be adjusted as conditions merit.
This news is encouraging – in fact, this was exactly the point of a newsletter we published a few weeks ago. Greater diversification is still one of the best ways to limit downside risk. But branching out beyond the conventional wisdom also puts investors in a tough position. Too many “alternatives” are sold to investors who don’t understand what they’re getting involved in, which is almost always a recipe for a bad experience. For instance, anyone who followed the “four asset class” model Market Watch describes above was probably not too pleased with the way their precious metals performed during last week’s increased volatility (or in 2008 when gold crashed).
Of course, the real take away from this shouldn’t be the idea that there’s a “perfect” allocation model, or that it is forever fixed in stone (sometimes you may want to increase one side and decrease the other to respond dynamically to changing market conditions). In the end, whether it’s 33/33/33 or 42/28/30 or something else, investors need to find a model that they’re comfortable with, and with choices that they understand.