Blue Bell Private Wealth Management

INSIGHT

The Fall of the 60/40 Portfolio

Alex LaRosa

Investment Advisor Representative

October 22, 2019

For nearly 70 years, the 60/40 strategy has been the standard for most investment portfolios. Now, has this approach has become too risky and structurally incapable of meeting its intended objectives?

What is a 60/40 Portfolio?

Foundations of the 60/40 portfolio emerged from Harry Markowitz’s Modern Portfolio Theory (MPT) work in the 1950’s which won him the Nobel Prize. The approach divides a portfolio into 60% equites and 40% fixed income to diversify and reduce volatility.

Why its dead

Low real returns of Bonds

The 60/40 rule was created when bond yields averaged 8% and the stock market 12%. This is no longer the case. Today’s rate environment has made the annual yield on bonds close to zero. The current return on the 2-year US treasury is 1.48% making the real return (minus inflation) negative. So, while the fixed income part of the portfolio will provide some protection the upside potential is just not there.

Longevity Shifts focus to growth

People are living longer, and many will have retirements lasting over 20 years. That is a considerable amount of time with little or no income to support their lifestyles. Which means that the once popular approach of shifting to fixed-income for security carries too much risk. The focus needs to remain on growth both to and through retirement. The 60/40 portfolio can no longer provide that. In the table below we will compare the performance of a portfolio comprised of 60% large-cap stocks and 40% 2-year treasuries vs. one of 100% large-caps. This time period covers the last 15 years and includes the great recession of 2008.

As you can see the annualized return over the last 15 years is 6.06% for the 60/40 vs 9.12% for the 100% large-cap. An investment of $100,000 in 2004 in large-caps would have turned into $307,495.72 vs $226,705.33 for the 60/40.

Better alternatives

There are better alternatives to fixed income to reduce risk in a portfolio. For instance, we use a hedged equity approach with structured notes and covered call writing. This allows us to reduce risk and volatility for our clients while still giving them long-term growth potential.  

If you are concerned with how your portfolio is structured, we would be happy to sit down and review it with you. Blue Bell Private Wealth Management provides complimentary consultations for anyone who is interested. Call us at 610-825-3540 or click the Speak to an advisor button to schedule a time that works for you.

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The Fall of the 60/40 Portfolio

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