Is the 60/40 Approach to Investing Dead?
The conventional approach to investing is dead. Here’s why the 60/40 portfolio allocation no longer works. The economic fallout from the Covid-19 pandemic may have eroded decades of sound financial advice. With interest rates anchored near zero for years to come, traditional bond investments are no longer a source of stability. You’ve probably heard of the 60/40 portfolio allocation as many investment advisers use this investing rule. It consists of allocating 60% of a portfolio to equities and 40% to bonds. The idea is that this allocation will capture the long-term gains made by stocks while relying on safe fixed-income assets (like government bonds) during short-term stock market downturns.
This Investing Strategy Has Worked Well In The Past
Bonds hedge growth risk, and stocks hedge against inflation. The 60/40 investing rule currently works because the results are negatively correlated. But that correlation could switch soon, which is one reason the allocation might no longer work. The traditional allocation has performed admirably over the past four to five decades, yielding around 10% per year over that period. A 60/40 fund would have also helped offset losses this year. Vanguard’s Balanced Index Fund posted a gain of more than 4% since the start of the year. The S&P 500 is down more than 1% over the same period.
While this portfolio has worked reasonably well over the past 40 years, the strategy could be running out of steam.
Investors Should Diversify Into Other Asset Classes
Investors’ needs change throughout their life. Relying on general investment rules can put them at a disadvantage when they do not consider specific needs, goals, or life stages. Younger investors might prefer to have a more aggressive investment strategy as they are far from retirement. Some of them are 100% invested in stocks, but that’s a risky strategy. A well-diversified portfolio should include more asset classes than just stocks and bonds.
Alternative investments such as hedge funds, real estate, commodities, precious metals, private equity, and inflation-protected assets are new additions to the well-balanced portfolio. A portfolio that includes several asset classes can have a higher return with a lower risk than a traditional portfolio. Adding gold to a portfolio is a good idea. The investment characteristics of gold are very different from traditional assets like stocks and bonds. Gold tends to outperform during times in which stocks and bonds underperform. The world enters a new era of investing, which may not be favorable to the standard 60/40 portfolio.