A growing number of advisors, academics and prognosticators are urging the investment community to abandon the traditional 60-40 balanced portfolio.
At issue are recent actions by the Federal Reserve to increase the money supply. That has hurt the bond market and thrown the wisdom of the classically diversified portfolio into question.
“The game changer is that the M1 money supply just went from $6 trillion to $18 trillion in 12-months,” Mike Willis, founder and lead portfolio manager of Index Funds, told InvestmentNews. “The Fed, by pumping trillions into the system, just made obsolete any investment strategy that holds bonds.”
A 60-40 fund is a long popular mix for investors interested in a buy-and-hold approach. In the most common version, 60 percent of a fund is held in stocks and 40 percent consists of bonds (often government bonds, but sometimes corporate debt.)
The recent change in bond value as the money supply rose marks an abrupt end to a long run of good times for 60-40 funds, according to CityWire, which notes that the “remarkable bond bull market” turned a $100,000 portfolio split between equities and bonds at the end of 2014 into more than $190,000 by the end of February 2021.
Those days of easy returns are over. “A theoretical global portfolio that buys and holds a typical mix of global equities and bonds [now] has a rolling nominal yield that is already below the average G7 inflation as measured over the last five years. The result is a negative real yield,” a quant strategist for Societe Generale said, according to CityWire.
In November, Jared Woodard, head of the Research Investment Committee at BofA Securities, voiced similar concerns about the traditional 60-40 mix.
“As yields on bonds head lower and lower—the 10-year Treasury note pays 0.7% per year—there’s less return in fixed-income securities for buy-and-hold investors. So that insurance works less well over time,” Woodard told Kiplinger. “Plus, the prospect of government policies to boost economic growth increases the risk of inflation. Treasuries could become more risky as interest rates start to rise and prices, which move in the opposite direction, fall.”
