Stock trader on the floor of the New York Stock Exchange.
Spencer Platt | Getty Images News | beautiful pictures
The index has fallen 20.6 percent in the past six months, from its peak in early January – its steepest drop since 1970, when investors worries about decade-high inflation.
Meanwhile, bonds are also affected. The Bloomberg US General The bond index fell more than 10% year-over-year.
The move could cause investors to rethink their asset allocation strategies.
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While the 60/40 portfolio – a classic asset allocation strategy – may be suffering, financial advisors and experts don’t think investors should sound the death knell for it. . But it may need adjustment.
“It’s stressful, but it’s not dead,” said Allan Roth, a certified financial planner based in Colorado and founder of Wealth Logic.
The strategy allocates 60% to stocks and 40% to bonds – a traditional portfolio with a moderate level of risk.
More generally, “60/40” is shorthand for the broader topic of investment diversification. The thinking is: When stocks (the growth engine of a portfolio) underperform, bonds act as a support because they often don’t move in tandem.
The classic 60/40 mix includes U.S. equities and investment-grade bonds (like U.S. Treasuries and high-quality corporate debt), said Amy Arnott, a portfolio strategist at Morningstar. ).
Until recently, the combination was hard to beat. Investors with a 60/40 base rate received higher returns in each of the following three-year periods from mid-2009 to December 2021, compared to investors with more complex strategies, follow a analysis by Arnott.
Low interest rates and below-average inflation have boosted stocks and bonds. But market conditions have fundamentally changed: Interest rates are rising and inflation at the highest level in 40 years.
As a result, the average 60/40 portfolio is struggling: It’s down 16.9% this year through June 30, according to Arnott.
If it were to hold, that performance would be trailed only by two recession-era recessions, in 1931 and 1937, with losses of up to 20%, according to one report. analysis in the history of 60/40 annual returns by Ben Carlson, director of institutional wealth management at New York-based Ritholtz Wealth Management.
Of course, the year isn’t over yet; and it’s impossible to predict whether (and how) things will get better or worse from here.
And the list of other good options is slim, at a time when most asset classes are going bad, according to financial advisors.
“Fine, so you think the 60/40 portfolio is dead,” said Jeffrey Levine, CFP and director of planning at Buckingham Wealth Partners. “If you were a long-term investor, what else would you do with your money?
“If you’re using cash right now, you’re losing 8.5% a year,” he added.
Levine, who is based in St. Louis, said: “There is still no better alternative. “When you are faced with a list of inconvenient options, you choose the ones that are least inconvenient.”
While a 60/40 portfolio may not be outdated, investors may need to recalibrate their approach, experts say.
“Not just 60/40, but what’s in 60/40” is also important, Levine says.
But first, investors should review their overall asset allocation. Maybe 60/40 – a middle-of-the-road strategy, not too conservative or aggressive – isn’t right for you.
Getting the right one depends on many factors that switch between emotions and math, such as your financial goals, when you plan to retire, your longevity, your comfort with volatility, how much you want to spend in retirement and how willing you are to return to spending it when the market goes down, Levine says.
According to Arnott at Morningstar, while bonds have moved similarly to stocks this year, it would be unwise for investors to abandon them. “Bonds still have some significant benefits to mitigating risk,” she said.
Bonds’ correlation with stocks has increased by about 0.6 percent over the past year – still relatively low compared to other equity asset classes, Arnott said. (A correlation of 1 means the assets follow each other, while a 0 means there is no relationship, and a negative correlation means they move in opposite directions.)
According to Vanguard, their mean correlation has been mostly negative since 2000. research.
“It has the potential to work over the long term,” Roth said of the diversification benefits of bonds. “High-quality bonds are much less volatile than stocks.”
The current market has also proven the value of diversifying more widely into the bond-equity mix, Arnott said.
For example, adding diversification in a portfolio of stocks and bonds under the 60/40 strategy has resulted in an overall loss of about 13.9% for the year to June 30, improving the loss to 16, 9% compared to the classic version that combines U.S. stocks and investment-grade bonds, according to Arnott.
(Arnott’s more diversified experimental portfolio allocates 20% each to large-cap US stocks and investment-grade bonds; 10% to each of developed and emerging market stocks, global bonds) and high-yield bonds; and 5% per small-cap stocks, commodities, gold and real estate investment trusts.)
“We haven’t seen the [diversification] “Diversification,” she said, is like an insurance policy, in the sense that it has costs and may not always pay off.
“But when it happens, you can be happy to have it,” added Arnott.
Investors looking for a hands-on approach can use a target date fund, Arnott said. Money managers maintain diversified portfolios that can automatically rebalance and mitigate risk over time. Investors should hold these in tax-advantaged retirement accounts rather than taxable brokerage accounts, Arnott said.
A balanced fund will also do well, but the asset allocation should remain stable over time.
According to financial advisors, self-employed people should make sure they have geographic diversification in stocks (outside the US). They may also want to lean more towards “value” than “growth” stocks, as company fundamentals are important during challenging cycles.
Regarding bonds, investors should consider short-term and medium-term bonds over those with longer maturities to reduce the risk of rising interest rates. Roth says they should avoid so-called “junk” bonds, which tend to behave more like stocks. I link provide a safe hedge against inflation, though investors can generally only buy up to $10,000 a year. Treasury inflation-protected securities also provide an inflation hedge.