Good Old Faithful, or Just Old?

The popular 60/40 balanced portfolio (60% equities, 40% fixed income) has been a staple for many investors through their lifetimes and deservingly so. According to a recent piece by M. Batnick, 60/40 portfolios have boasted an annualized rate of return of 7.5% and positive rolling five-year returns in 99.4% of cases over the past half century. However, given the current economic environment and valuations of both equities and bonds, is it time to reconsider this popular allocation? A recent B. Ritholtz article, along with the aforementioned piece by Batnick, investigate recent assertions by Wharton finance professor, Jeremy Siegel, that the new allocation should be adjusted to 75/25. This is in conjunction with investors broadly downgrading their long-term return expectations for a balanced portfolio. Given that the average U.S. Treasury 10-year yield over the last 50 years was 6.2% relative to the current level of 0.7%, a buy-and-hold investor with a static required return target may be forced to increase their exposure to equities for an overwhelming contribution to aggregate returns. However, Ritholtz reports that Siegel “does not expect the same 6-7% returns stocks have delivered over the past two centuries. Looking forward into the next century, he expects U.S. equity returns to be closer to 5-6%”. Thus, even with an increased equity allocation from 60% to 75%, investors may have to accept that future returns are unlikely to match what has been achieved historically. However, before throwing in the towel, is there another option? Do we need to reconsider traditional asset allocation and portfolio construction? Our VIPCo team recently published a piece on a “Risk Parity” investment strategy, which views asset allocation through a completely different lens.