Long live the 60/40 portfolio

By Stuart Ritchie, Managing Partner at GSB.

The shift away from the traditional 60-40 portfolio has been a topic of much discussion, particularly following the challenges of 2022 when both bonds and stocks experienced declines.

Since 2022, I have been repeatedly asked if this was the ‘death’ of the 60-40 portfolio, which is a main component of the advice client’s investment strategy. The debate on the ‘death’  or otherwise of the 60/40 portfolio continues to loom large in the multi-asset world today.

But are reports of its demise premature?

In my experience, a globally diversified portfolio of stocks and bonds remains an extremely viable option for investors; however, personalised portfolio advice based on an individual’s circumstances often proves invaluable.

60/40 portfolio

Balance

One of the main questions often asked is whether investors should consider holding a larger proportion of equities than bonds. I believe they should, but they should never go all-in on equities.

For many investors, the idea of their portfolio plummeting by 37% in a single year is simply too daunting – especially if a client is close to retirement age.

When you factor in investments in areas such as smaller companies and/or value companies, while the opportunity for double-digit returns might be tempting, the potential for a £1m portfolio to drop to £500,000 within a year becomes a stomach-churning reality for most investors.

Clients simply cannot afford to suffer massive losses like this – and the concept of the 60-40 portfolio, designed to create a balance between the performance of equities and bonds, allows clients to feel at ease.

 

Time diversification and volatility

Source: JP Morgan Asset Management

According to the J.P. Morgan Asset Management Guide to the Markets (above), a 60/40 portfolio has delivered an annualised return of 9.3% with a much-reduced drawdown of 20%. This makes sleeping at night a lot easier during those periods of volatility.

These figures provide valuable context when considering portfolio allocations and risk management strategies.

Risk and the 60/40

The 60/40 portfolio is the standard bearer for investors with a moderate risk tolerance. It gives you about half the volatility of the stock markets but has provided investors with good returns over the long term.

If we look at the historical long-term returns of cash, bonds, and equities, cash has the lowest expected return, followed by bonds and then equities. However, this is also reflected in the volatility of the holdings, with cash returns being significantly more stable than equities. Cash, however, does not keep up with inflation, thus reducing the ‘real’ value of assets over time.

Emotions always win, so it’s extremely important to have a portfolio that you can stick with when the periods of volatility appear…and they are guaranteed to do so.

Going back to 1929, there have only been three years where bonds didn’t rise when stocks went down, so ensuring a balance between the two asset classes is a tried and trusted formula. However, investors need to be steadfast over volatile periods,  especially if we see another year like 2022.

A 60/40 portfolio offers great value for most risk appetites. However, younger investors and those saving regularly should consider adding more equities to the mix, perhaps considering an 80/20 split, as the equity side will likely drive returns over the longer term.

A 60/40 approach is a good starting point, though. It is also important to rebalance on an annual basis to ensure that portfolios remain around the appropriate weightings. There is an expectation to see equities outperform bonds three years out of four, so if left untouched, investors could find that they are holding a portfolio more like 70/30 or 80/20, and if there is a year of volatility, investors will be over-exposed to equities/growth assets.

Introducing alternatives

One interesting debate around the decline of the 60/40 portfolio is the growth in popularity of alternatives as an asset class.

Some suggest that a 60/20/20 split involving alternatives should be the norm for advice clients. A case can be made for holding alternatives such as commodities and private equity, and this can help enhance the risk/return profile, but it is a difficult proposition to implement.

However, if the majority of a retirement fund is in equities and bonds, it is worth considering investing a smaller part in alternatives.

For most investors, sticking with a simple equity/bond balance is likely the best option. Alternatives are not for everyone, as you have to weigh up the potential diversification benefits against (usually) higher costs, complexity and illiquidity.

Conclusion

Critics may argue that the traditional 60/40 model is outdated or ineffective in today’s market. However, such claims overlook the enduring principles of diversification and risk management.

An easy to understand and simple to implement portfolio like the 60/40 will remain an essential tool for investors seeking to manage risk while pursuing returns over and above what is available in cash.

It may adapt in the future, however, the evidence gathered from decades data would suggest that it will remain a fundamental choice in its current state for investors for the foreseeable future.

Speak to us today to learn more about how you can contribute through your investment choices and our new partnership with Feefo. Together, we can make a world of difference.

Get in touch

Contact GSB today if you would like to discuss any of these matters with our in-house team.

Our dedicated team provide a uniquely elevated financial service experience shaped around you. We offer the flexibility to meet your financial needs confidently anywhere in the world. For further information, please contact GSB. Dubai (Headquarters), Office 901, Floor 9, West Wing, The Gate, Dubai International Financial Centre, PO Box 938542, Dubai United Arab Emirates telephone +971 4 251 6111.

Disclaimer

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

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