🥧Is The 60/40 Portfolio Dead?

For as long as anyone can remember, the 60/40 allocation served portfolios pretty well. The rule of thumb went like this: stash 60% of your portfolio into stocks and 40% into bonds. Splitting the pie this way gave investors solid returns with lower levels of risk. 

The bonds were your knight in shining armour when things turned sour in equity land while the chunky allocation of 60% to stocks boosted returns during the good times. So far so good. In the past decade alone, the 60/40 portfolio returned investors a handsome 10.2% each year with gains of 15.3% this past year. The perfect combo, you might think. And indeed, it was. Until now. 

Trouble in paradise 

Last month marked the breaking down of this monumental relationship between equities and (governments) bonds. Diversified portfolios suffered their heaviest loss since the pandemic broke out. The once ‘all-weather’ 60/40 portfolio lost 3.5% last month alone – its biggest slump since March 2020. Ouch. 

Inflation (rising prices) is baring its large teeth while bonds yield virtually nothing though I suspect this will not last for long as governments will, sooner or later, need to put a lid on inflation. Oh, and US stocks are sitting at record-highs in what is their longest bull-run since 2012. All good things must come to an end. And September 2021 was the litmus test. 

So, where does this leave us?

Scrounging for returns that’s for certain. With inflation on the rise, bonds won’t be your friend thanks to inflation eroding their value, much like the sun to your snowman. £100 today will not be the same £100 next year, or in five years’ time. It will be shrivelled and sad.

Luckily, equities are a good alternative as they have historically protected our dosh against the forces of inflation, especially small caps because these tend to be rather niche businesses, the kind that allows them to pass on higher costs to consumers – inflation’s antidote. Companies that are able to charge us lot (the consumer) higher prices are worth looking into for an inflation-hedge. 

The real deal 

When inflation lingers around (much like it is now) and overstays its welcome, you’ll want to own real things like real estate but also the ‘dirty’ stuff like oil and mining (a.k.a commodities). Because, when it comes down to it, money now is way better than waiting for maybe monies. Stocks that pay dividends (REITs, financials, energy, mining) are also likely to be your umbrella in an inflation downpour. 

The worst of both worlds 

We are very likely entering a state what economists call ‘Stagflation’. No, I’m afraid this has nothing to do with Stag dos and everything to do with sluggish growth and high inflation. This is a double whammy since we not only don’t get high growth (and all the good stuff that goes along with it) but we’re left with something soggy with a double helping of inflation. 

With low growth, governments don’t want to run the risk of raising rates too high too soon to tackle the inflation problem for this will kill off any growth left but this means that leaving money in bank accounts is guaranteed to lose you money year-on-year since interest rates will be lower than inflation. 

In Germany (the land of the risk-averse), its citizens hold a whopping $6.8trn in deposits. Their interest rate is currently negative which means that German savers must pay their banks to hold their money for them, a. guaranteed tactic to lose money every single year. But that doesn’t bother them for the alternative (taking risk) is far, far worse. 

But investing is how you’ll grow your money. There is risk in everything. There is risk in leaving money in a bank account (money pile will shrink each year) and there is risk in markets. You choose your kinda risk. 

This one rhymes 

In the late ‘60s (I know, well before our time!), all everyone wanted was the hot growth stocks – sound familiar? Xerox was our Tesla. It was all the hype. Boring (a.k.a non-growth) stocks fell by the waste-side. But then came the mother-of-all bear markets that lasted until the mid-‘70s. This was a harsh reminder that nothing good lasts forever. And, as we know, during bear markets (a decline of 15%), it’s tough to make good returns. 

The stock market has become a place of confusion and frothiness (thanks to the Fed’s money-printing) that it has become almost impossible to bag a bargain. Everything has become expensive. As ever, plan for the worst but hope for the best.

These past two decades have seen record-low interest rates a.k.a cheap money that allowed almost everyone to load up on debt that came with virtually no strings attached. We’ve been on a stunning bull run. Tech has had its time in the sun. But something tells me that these next two decades will look starkly different from what we witnessed. I hope we’re not entering the 70s-style anything but only time will tell. 

Photo by Giallo on Pexels.com

I believe there is always a silver lining, and I think I’ve found ours. Since many of us are in our 20s, saving for a house is (I hope!) our number one financial priority. Well, since real estate has hit record highs, and property crashes occur every 18 years, something tells me this might work in our favour.

Rising interest rates could also come to our rescue. Since this will increase borrowing costs (no more of that no-strings-attached-free-money stuff), the rush to buy property could slow down quite a bit leaving us lot to hop on that proverbial property ladder. 

But no one knows the future. It is riddled with uncertainty. I wish I had a crystal ball but where’s the fun in that. It could be that these next years are the growth spurt years for tech and all that other glam stuff. It could be that inflation doesn’t really stick around and that its unwanted arrival was due to the pandemic. Or, it could be the total opposite. So embrace change and uncertainty and do not be too rigid in your outlook. If recent times have taught us anything, it’s that nothing is guaranteed. Nothing is ever set in stone. All can change in an instant. 

To profit during uncertain times, you need to think outside the box. Following the crowd could leave you holding the bag and no one wants to be that person. A recipe for success is to invest in yourself, create additional sources of income and learn new skills for these will generate the very best returns and will stay with you no matter what moves the market chooses to make.  

The investment adage: past performance is not an indicator of future performance couldn’t be truer.  

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.