Is the 60/40 Portfolio Still Relevant?

In the ever-evolving landscape of investment strategies, one of the longstanding approaches has been the 60/40 portfolio. But as markets change, some investors are seeking alternative concepts to save for retirement. Let’s dive into what the 60/40 portfolio entails, its potential shortcomings, and the emerging alternatives in the modern investment world.

What is the 60/40 portfolio?

The 60/40 portfolio is an investment strategy that allocates 60% of the portfolio to equities (stocks) and 40% to fixed-income investments (bonds). This mix aims to balance the growth potential of stocks with the stability and income generation of bonds. The rationale behind this allocation is to achieve a diversified portfolio that can weather various market conditions.

Potential drawbacks of the 60/40 portfolio

While the 60/40 portfolio has been a popular strategy for decades, some investors are turning away from it. Here are some of the reasons:

• Stocks and bonds perform differently than they used to due to increased risks in bond markets, new monetary policies in place, and developments in digital technology that impact industry and the economy, according to Bob Rice, Chief Investment Strategist of Tangent Capital.
• Since the pandemic, the market has behaved differently: 10-Year U.S. Treasury bonds are producing negative returns on equity down days, according to BlackRock. This is a reversal of the bonds’ performance prior to the pandemic.

Alternative to the traditional 60/40 portfolio: the modern portfolio

The modern portfolio, often referred to as a more diversified or alternative portfolio, seeks to address these potential shortcomings by including a broader range of asset classes. Instead of splitting a portfolio between only public equities and fixed-income bonds, the portfolio expands to incorporate assets such as real estate, commodities, private equity, and other private or alternative investments.

The idea is to enhance diversification and potentially increase returns while varying risk.

Why might investors seek out a modern portfolio?

Reasons an investor might seek out a diversified, modern portfolio instead of a 60/40 stocks/bonds portfolio include:

• Enhanced diversification and risk management: As mentioned above, modern portfolios often include a wider range of asset classes, such as real estate, commodities, private equity, and other alternative investments. This broader diversification can help mitigate risks by spreading investments across more sectors, reducing the impact of any single asset class’s poor performance on the overall portfolio.
• Adapting to changing market conditions: The financial landscape is continuously evolving, and strategies that worked in the past may not be as effective today. The modern portfolio approach allows investors to adapt to current market conditions by including assets that can perform well in various economic scenarios. This flexibility helps in better managing economic uncertainties and capitalizing on emerging investment trends.

Considerations of a balanced portfolio and asset allocation

It’s important to consult with your financial advisor before making any portfolio moves. If you decide to move ahead with alternative investments, there are ways you can evaluate potential investments for suitability.

BlackRock recommends looking at the “three Ds” of an investment:

• Diversifying: Does your chosen strategy truly diversify your portfolio? Does its historical activity correlate with other assets you hold?
• Durable: Does the asset historically show consistent returns with low volatility?
• Defensive: How has your strategy historically performed on equity market down days? Is it an asset that can help stabilize your portfolio when it’s most needed – at times of market stress?

Of course, it’s recommended to regularly review and adjust your portfolio to align with your financial goals, risk tolerance, and market conditions.

How investors can leverage a modern portfolio

Creating a modern portfolio has become increasingly more accessible to the average investor. Private market investing, once limited to institutional investors and high-net-worth individuals, is becoming more popular,

One way to invest in alternatives is with a self-directed IRAs (SDIRA), which allows investors to hold a variety of alternative investments within their retirement account. An SDIRA provides investors with the flexibility to diversify their retirement portfolios beyond traditional stocks and bonds, potentially enhancing returns and managing risks more effectively.

At Equity Trust, IRA investors have access to an array of alternative investments through our WealthBridge portal – which integrates with investment platforms – and Investment District online marketplace – which provides links to dozens of asset providers offering a variety of investment types.

Discover more about diversifying your portfolio

For more information on the modern portfolio approach and diversification options for retirement accounts, watch our on-demand webinar, “Diversifying Beyond the Stock Market: How to Get Started.”