Don't turn your back on the 60/40 portfolio

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Despite the rise of alternative asset classes, the traditional mix of 60% stocks and 40% bonds is still the best asset allocation for the majority of investors, said Fran Kinniry, a principal in Vanguard's Investment Strategy Group.

Advisers have been increasingly turning away from the 60/40 portfolio in favor of less traditional asset allocations, according to a recent survey from Natixis Global Asset Management.

The survey of 163 financial advisers found that half no longer believed a 60/40 mix was the best asset allocation to achieve performance and to manage risk.

Kinniry said he agrees that the performance of the 60/40 portfolio over the next 10 years isn't going to come anywhere close to what it's been historically, mainly thanks to the record valuations and low yields in bonds today. In fact, he warned it could return as much as 50% less than its historical average of around 8% or 9% a year.

But when it comes to managing risk, the 60/40 portfolio is still an adviser's best bet, said Kinniry, adding that chasing after a hot new asset class just sets advisers up for failure, more often than not.

Managed futures funds, for example, have grown to approximately $9 billion in assets since the financial crisis — thanks primarily to their out performance during that period. Since 2008 however, the average managed futures fund has lost money while stocks and bonds have rallied.

“The risks of trying to avoid the risks [of the 60/40 portfolio] are greater than the risks themselves,” Kinniry said.

The reason he is confident in the classic strategy is that over the past 20 years, nothing has been a better hedge against the downside in equities than investment-grade bonds.

Hedge funds, commodities, and real estate investment trusts are all touted for their diversification benefits, but when equities have been under the most pressure, all those investment classes have fallen along with stocks, albeit in most cases not as far.

“Historical correlations are meaningless,” Kinniry said. “You need to look at correlations in times of stress. That's the only correlation that matters.”

Treasuries and investment-grade corporate bonds are the only two asset classes that consistently generated a positive return during the worst stock drawdowns since 1988, according to Vanguard.

Would you still recommend a ratio of 60/40?

Original article by Jason Kephart of InvestmentNews. Read it here.

  • Wally on 10/01/2013 11:14:25 AM

    I agree 100% with you Pat. Advisers who pick stocks are kidding themselves. When they run the performance numbers they'll be lucky if they get anywhere near the index let alone beat it and will have spent countless hours on admin and reporting. For what? a false feeling of control. It's a myth that the average adviser can beat the fund managers and is an extension of the one that pushes clients to try their hand at investing via their own SMSF. By a LIC if you're worried about overpaying on management fees.

  • Fred Jones on 10/01/2013 10:19:50 AM

    Pat, I think what James is saying is that as the active managers performance is so poor, advisers are going to turn to Index funds, and these overcharging active managers will eventually go out of business.

  • Pat on 10/01/2013 9:30:36 AM

    Interesting comment, James. Are you suggesting that, in addition to client meetings, business development, professional development, business management, an adviser will have the same time and skill as a fund manager to choose stocks "successfully"? Given that there is so much research that shows the active managers fail to get it right consistently, I pity the client of an "adviser" who thinks they can pick stocks.

  • James Howarth on 9/01/2013 11:10:30 AM

    All funds except index funds days are numbered. Most advisers are now as qualified as fund managers./ Why pay twice. Fund managers are a dying bread.

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