When practically everything is being sold off there’s almost nowhere to hide for investors, even those following one of the most conservative approaches out there, Bloomberg reported.
The classic 60/40 portfolio — a strategy named for the share allocated to equities and high-grade debt, respectively -- is down more than 10% this year, leaving it on pace for the worst drubbing since the financial crisis of 2008. Unlike then, though, it’s not just growth that’s a worry.
It’s not the first time analysts have questioned whether the 60/40 mix will hold up, with some casting doubt during the early months of the pandemic only to see it deliver large returns as stocks surged. Yet the combination of tighter monetary policy and rising consumer prices has led to mounting warnings to investors that such gains are unlikely to endure.
During the so-called “lost decade” of the 2000s, the “60/40 portfolio generated a meagre 2.3% annual return and investors would have lost value on an inflation-adjusted basis,” Goldman Sachs Asset Management’s Nick Cunningham, the vice president of strategic advisory solutions, wrote in October.
The rallies of recent years were a boon to 60/40 portfolios, with rock-bottom interest rates pushing up both bond prices and stock valuations, particularly those of high growth companies. The mix delivered an average return of 18% from 2019 through 2021, according to data compiled by Bloomberg. Since 2000, the inflation-adjusted return has been around 7.5% on a rolling 12-month basis, according to Morningstar.
But the Federal Reserve’s plans to raise interest rates is now hitting bonds while higher oil and commodity prices are dragging down stocks by raising the spectre of 1970s-style stagflation -- posing potentially sustained headwinds to both parts of the 60/40 strategy.
That inflation threat has made other assets potentially more alluring than bonds. Pacific Investment Management Co. recently recommended shifting a portion of 60/40 portfolios into in commodities to hedge against elevated inflation. “When inflation increases, asset values generally fall,” and “even a small allocation to commodities may materially improve the inflation protection of a traditional 60/40 stock/bond portfolio,” it said.
