The 60/40 Portfolio is Dead

“A 60% allocation of stocks and 40% allocation of bonds in a portfolio protects from market volatility and maximizes growth”.

“A 60% allocation of stocks and 40% allocation of bonds in a portfolio protects from market volatility and maximizes growth”. This is the advice almost every investor over the age of 30 will have been given, but times are changing. While the 60/40 split advice might have rung true for the last 40 years and yielded 10% per year in the process, current low bond yields are making financial advisors and individual investors question this tried-and-true investing approach. Is it time to reevaluate portfolio diversification methods for a post-pandemic world? 

Historically, the 60/40 portfolio split investment approach has worked because of the negative correlation between stocks and bonds. Stocks hedge against inflation, while bonds hedge growth risk. The former provides long-term gains, while the latter is a more reliable income source during market downturns. But many experts say this correlation is weakening, meaning it’s no longer safe to rely on one to cover the other.

Bond yields are low. So low that they’re now no longer high enough to cover the loss of income during market downturns. What once made an effective hedge has seen its ability to do so severely compromised. As people live longer and therefore need their investments to fund 20-30+ years of retirement, poor results are not an option. And the challenge of securing adequate returns is only going to get more complicated as life expectancy increases. Couple the above with rising inflation, and therefore expenses, and the traditional 60/40 portfolio allocation many rely on is no longer enough to keep pace over the long-term. 

JP Morgan, the global leader in financial services, reports that a portfolio with a 60/40 split is expected to return just 3.5% annualized returns over the next decade. This constitutes a 6.5% drop from the 10% annualized returns that have been true for the last 40 years. Given that the S&P 500 index alone returns an average of 7-8% a year and investors can’t afford not to change up their strategies particularly for those living off portfolio-derived income. 

But all is not lost. Investors today have more options available to them than ever before, and accessing the tools and experts needed to get results has never been easier. For those looking to secure their financial future, defined outcome investments can help. You may have heard of structured notes, indexed annuities, and buffer ETFs, which are all different forms of defined outcome investment products.

There are three main types of defined outcome investing strategies 

  1. Growth - accelerate gain by a factor of 2x, 3x, or greater up to an upside ceiling
  2. Hedged - get some downside protection in exchange for capping upside at ceiling
  3. Income - make a fixed return and lose only if the loss cushion is breached

All three strategies involve turning individual stocks, ETFs, and indices into outcomes that can be customized to fit your risk/return profile. Imagine being able to make 3x the gain up to 32% (growth) on your favorite stock. Or make up to 25% and not lose unless your favorite stock falls by more than 20%. Or make a fixed 15% unless your favorite stock falls by more than 30%. Reach out to us to learn more.


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