'60/40' Portfolio: Down But Not Out

February 03, 2014

The traditional portfolio approach is getting new scrutiny as markets change.

The inevitable end of a 30-year bull market in bonds now seems to be in sight. With yields so low and bond prices poised to go nowhere but down, a chorus of calls has piped up that perhaps the historical 60/40 paradigm of portfolio diversification is ripe for repeal.

The call to arms sounds like this: Bail out of bonds before you get killed, but be sure to load up on things like dividend-paying stocks and other income-replacement strategies. Doing so, of course, means upsetting that long-standing 60 percent stocks, 40 percent bond balance. If that sounds too facile, it’s because it probably is.

Much of that call to action is emanating from those who would benefit from the demise of the world of the 60/40 portfolio. That would mainly be tactical asset managers and, perhaps more so, those who serve up so-called risk-parity strategies that seek to bridge the gap between equity and fixed-income risks using all kinds of fancy and relatively costly tools, including leverage.

The deeper consideration that should give all investors pause is that “60/40,” while having the appearance to some of being a calcified construct, is actually a tangible way—with a tangled track record—of implementing basic diversification in asset allocation in a disciplined manner.

“Sixty/40 is anchored in a really important existential point—the benefit of diversification,” Nicholas Colas, chief market strategist at ConvergEx Group, said in a recent interview. “So, to say that 60/40 is dead is basically to say that diversification is dead—at least as far as it goes between stocks and bonds.”

The idea of throwing out 60/40 has come up before, notably after the Internet bust. But at that time, the temptation was the opposite of what it is now; namely, to pile into bonds at the expense of stocks, which had been creamed after the Nasdaq topped out on March 10, 2000.

The late Peter Bernstein, who penned the classic must-read history of risk, “Against The Gods,” mounted a simple, thoughtful and timeless defense of 60/40 in a 2002 Bloomberg Markets magazine article titled “The 60/40 Solution.” As the title suggests, Bernstein argued that even if investors were having trouble making peace with 60/40, peace they had better make.



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