Hello. I don't recall having as many school holidays when I was a child as my two children do, and certainly not for as long! After taking our 2020 trip to Vanuatu in 2023, we're back in town. Kids are back at school and financial markets continue to bamboozle investors.
BlackRock Ditches 60/40 Portfolio in New Regime of High Inflation
This was the headline one week ago via Bloomberg.
The 60/40 Investment Strategy Is Back After Tanking Last Year
This was the headline a couple of weeks ago via The Wall Street Journal.
Let me set the scene for you. During 2022, stocks AND bonds had a pretty shocking year, which meant that a "diversified" portfolio was unable to stand the hurricane that was destroying everything in its path. There was nowhere to hide. Here's what the last 25 years or so looks like for the traditional 60/40 portfolio. It's quite rare we see the 60/40 portfolio in the red:
Firstly, I don't think anyone is ditching the 60/40 portfolio, in fact, I don't think BlackRock is ditching the strategic allocation to Risky Assets (60) versus Defensive Assets (40). And I don't know if the 60/40 is back if it never went anywhere?
Here are a few observations:
This is not the first time we've heard such declarations.
This is not the first time we've encountered a high inflationary regime.
This is not the first time we've seen the 60/40 portfolio down in one year.
During the years of 2000-2003, and 2008/2009, the 60/40 portfolio was down because of the 60 part (equities), and not the 40 part (bonds), in fact, bonds were up during this time (see chart below). You have to go back to 1969 to see stocks and bonds down in the same year. And before that, 1941, and 1931. And that's it. A pretty damn good investment strategy if you ask me - 3 outlier years out of 94. In other words, works 96.80% of the time, and hasn't worked 3.20% of the time. Show me a better investment strategy. I'll wait.
BlackRock is in the business of selling stuff. More new funds, more new strategies, and even more reasons why what worked in the past won't work in the future.
There is always a reason why active management is supposed to work. And there is always a reason why passive management is going to fail this cycle. Yet, 80% of active managers fail to beat their own benchmarks. This is not my opinion, this is fact.
The market has evolved over the years, which allows investors to now access segments of the market that they may not have been able to access previously. Rather than referring to them as Stocks/Bonds (60/40), maybe we should be referring to them as Risky/Defensive.
Vanguard's take on the topic is far more in line with mine. You can read it here.
During the 2023 year so far, stocks are up 9.17% and bonds are up 3.82%, giving the 60/40 portfolio a total return of 7% this year. Imagine ditching the strategy after the ugly performance of 2022.
Is the 60/40 portfolio dead? Give me a break. More investors need to get their hands on this type of literature. It doesn't get the light of day because no one makes money out of it. Build all-weather portfolios that last all century.
I discuss more of what is going on in financial markets in Episode 39 of The Wide Lens Podcast, where I spoke to Andrew Papageorgiou of Realm Investment House.
You can also listen to the podcast on Spotify, Google Podcasts, and Apple Podcasts.