By Chris Glynn
For Jeff DeMaso, “60/40” is alive, but under stress.
“We are actually 70 to 30,” said DeMaso, joking about his current investment portfolio. His Adviser Investments is 60/40 and—to him—60/40 might need a slight tweak at most.
Like the financial market, the model investment portfolio of 60% equity and 40% fixed income is struggling. The S&P 500 Index lost 8% in June, turning in its worst six-month-performance since 1970 with a loss of 20%. Fixed income is also down: Bloomberg U.S. Aggregate Total Return Value Unhedged USD Index has lost 10% for 2022. Reassessing asset allocation, meanwhile, has become a financial hot button in private wealth.
But DeMaso, a certified financial analyst and director of research for $7 billion Advisor Investments, is adamant: 60/40 is now due.
“People in the industry are
rethinking typical portfolio investment,” he said. “But now is really the wrong
time to abandon ship.”
Defining the 60/40 portfolio
In general, 60/40 is financial shorthand, meaning a traditional—but well diversified—investment portfolio with a moderate level of risk.
Equity, or the common stock portion of the portfolio, is the actual per-share value of a publicly traded company, should the company be liquidated while the capital is returned to each shareholder. Equity is considered the exponential growth engine.
But if equity is underperforming—either after the daily market close or, if possible, longer—the 40% fixed income, such as the investment grade U.S. Treasury bond or high-quality corporate debt, is the prearranged counterweight. In classic Wall Street parlance, if equity is up, fixed income is down. Or vice versa. One asset class will in turn “hedge” the other.
Until late 2021, the combined 60/40 portfolio had been difficult to outperform. DeMaso pointed out the 60% equity and 40% fixed income mix did a better job of returning than did more-complex diversification.
However, a lowered interest rate as well as less-than-average inflation had heightened the stock and bond market, a fundamental switch in the interest rate and now a 40-year high in inflation has led to a massive change in the market. In turn, equity plunged into a bear market, while fixed income had sunk to a low end.
Where else to invest?
Meanwhile, the Bank of America Corporation declared “the end of 60/40,” while Goldman Sachs & Company warned the model portfolio could lose 10%. Deutsche Bank called for a hard shift in the 60% equity and 40% bond outlook.
“Sustained weakness across bond and equity further supported the end of 60/40 thesis,” B of A said in a report. “Adjusting for inflation, a 60/40 portfolio is on pace to lose 49%, which would be the worst annual return on record.”
“Inflation has been the wild card,” said DeMaso, but noted predicting how to invest to avoid the market downturn of 2022 is difficult.
Difficult, though not impossible. Eric Sterner, a CFA charter holder and chief alternative investment analyst who joined Apollon Wealth Management as chief investment officer, said he will continue to adjust the asset allocation of its portfolios given the market condition.
“We need to rethink and adapt to this challenging economic environment,” said Sterner, a former Prudential Financial executive who went to work for Apollon Wealth Management in July.
He said the $2.5 billion RIA will also continue to evaluate new alternative investment offerings to add to the Apollon Wealth Management investment platform.
Another approach could be a target-date fund, the private wealth manager said, adding to a diversified portfolio to rebalance and toggle down risk over time. A balanced fund, tilting toward value rather than growth, could also be helpful.
For fixed income, short- or intermediate-term fixed income—instead of longer-dated fixed income—can reduce against the rising interest rate.
However, as a private wealth manager asked Institutional Allocator by Market Group, “Where else are people going to invest if not our market?” Plus, if historic track record is a precedent on Wall Street, DeMaso noted 60/40 could be set for a “big gain.”
According to DeMaso, calculating a six-month return for the 60/40 portfolio going back to 1945 and identified each period with a 10% or greater decline. The result? DeMaso found 15 periods, not counting the first half of 2022. Meaning that large declines in a 60/40 portfolio are rare but not without precedent. A silver lining for investors? The returns following those large declines have tended to be attractive.
On average, 60/40 gained 10% over the following six months and was negative just once, he added.
“Over a year, 60/40 portfolio was higher each time, with an average return of 18.4%,” DeMaso said.