Ditching the 60/40 Mentality

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.

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See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.