OPINION: The so-called 60/40 portfolio is poised to make a big comeback. It is highly likely that such an allocation — 60% stocks and 40% bonds — will outperform an all-equity index over the next decade.
The death of the 60/40 portfolio has been widely accepted as growth and technology stocks overwhelmed gains in fixed-income securities since the end of the financial meltdown over 10 years ago.
That chart is a bit cluttered. I created a composite of the three underlying measures to get a clearer relationship. The chart below combines inflation, wages and economic growth into a single composite and compares it to the 10-year Treasury rate TMUBMUSD10Y, 2.715%. If yields are correct, then investors should be heeding its warning as lower yields will translate into slower rates of earnings growth. Of course, such is problematic for valuations.
More importantly, current allocations to equities are more than two standard deviations above the norm. Per Jim: If valuations are correct, and 150 years of historic evidence hold true, there is a significant probability equity returns will fall towards zero on a “buy and hold” basis over the next decade.
By reducing volatility, and the emotional battle, investors are able to take a more logical approach in managing their portfolio over time.
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