The 60/40 Portfolio Strategy May Be Broken For The First Time In History

Markets Benzinga

The traditional 60/40 portfolio investment strategy may now be obsolete. According to BMO analyst Lowell Yura, the strategy of a balanced portfolio of 60 percent equities and 40 percent bonds will likely dramatically underperform its historical gains in coming years.

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Yura says that the basis for the 60/40 strategy is the idea that bonds will generate stability and lower risk and will help balance the higher returns and higher risk of equities. However, this assumption that investors can expect moderate, stable returns from bonds may be unrealistic in the current market.

While interest rates have been historically low since the Great Recession, Yura pointed out that bond yields have been in secular decline since the 1980s.

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From 1981 to 2015, the balanced 60/40 portfolio has averaged a 9.6 percent annual return. BMO projects that the same portfolio will generate about 4.5 percent annual return over the next decade, weighed down by only 2.6 percent return from bonds.

To meet todays diversification challenges, investors will need to distinguish liquid alternative strategies that rely on new market exposure, such as volatility and frontier markets, and those that rely on manager skill, such as market neutral 130/30 long/short equity and macro strategies, Yura concluded.

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So far in 2016, the SPDR S&P 500 ETF Trust (SPY) is up 3.0 percent, the iShares iBoxx $ High Yid Corp Bond (ETF) (HYG) is up 3.4 percent and the iShares IBoxx $ Invest Grade Corp Bd Fd (LQD) is up 5.1 percent.

Disclosure: The author holds no position in the stocks mentioned.

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