The 60/40 Portfolio is Riskier than Ever

The comments below are an edited and abridged synopsis of an article by John Mauldin

As investors, we have to make assumptions about the future. We know they might be wrong, but something has to guide our asset allocation decisions.

The 60/40 Portfolio is Riskier than Ever | BullionBuzz
Investmments and asset allocation concept. Where to Invest? Newspaper and direction sign with investment options. 3d illustration

Many long-term investors assume stocks will give them 6–8% real annual returns if they simply buy and hold long enough. Pension fund trustees hire consultants to reassure them of this, along with similar interest rate and bond forecasts, and then make investment and benefit decisions.

Those reassurances are increasingly hollow, thanks to both low rates and inflated stock valuations, yet people running massive piles of money behave as if they are unquestionably correct.

But reliable, conflict-free sources are forecasting bleak numbers if you hope to earn any positive return at all, much less 6% or more. One reaction is to keep most of your assets in cash for at least a fractionally positive, low-risk return, but that probably won’t get you to your financial goals.

Mauldin discusses the 60/40 fallacy, and says that friends don’t let friends buy and hold. In conclusion, he says that you must have a well thought out hedging strategy if you’re going to be long the stock market.

If your investment advisor has you in a 60/40 portfolio and tells you that “We are invested for the long term and the market will come back,” pick up your capital and walk away.

Past performance does not predict future results. That has never been more true than for the coming decade. The 2020s will be more volatile and difficult for the typical buy-and-hold index fund investor than ever before.

Active investment management is not popular right now because passive strategies have outperformed, but that is about to change. Investors should start investigating active management and more proactive investment styles.

Relying on past performance as the tectonic plates shift, as the central bank policies suck historical performance into their maws, we must look forward rather than backwards to design our portfolios.

Please share...

Leave a Reply

Your email address will not be published. Required fields are marked *