As a professional copywriter, I read a recent report from Jared Woodard, the head of the Research Investment Committee at BofA Securities, about the drawbacks of 60/40 investing. While it may seem like a safe and reliable investment strategy, Woodard argues that stocks are precariously priced, and bonds might not provide the protection they’re supposed to.
Investors who follow the most popular index funds are likely to be disappointed, say Woodard. So, what should investors do? Well, diversifying away from the broad benchmarks might be the only way to get the returns you’re looking for, explains Woodard.
Although the basic premise of 60/40 investing is that stocks are lucrative but volatile, while bonds are dependable but dull, putting the two together doesn’t always make sense. Investors who are many years away from retirement might want to put more of their money into stocks.
However, last year’s events showed that the market can never be predicted. U.S. stocks lost 18%, but it was Long Treasuries that declined by 31%. These figures remind us that investing is an unpredictable game, and it’s important to think carefully about where to put your money.
In short, while 60/40 investing may seem like a tried-and-true strategy, it might be time to consider other options. Investing in assets outside of broad benchmarks could be the key to getting the kinds of returns that investors are looking for.
The Demise of 60/40: Is It Time to Move On?
As the year drew to a close, there was much debate about whether the 60/40 investment strategy was dead. However, some argued that the timing of this question seemed off – if it had died, it did so at the start of last year, when long bonds yielded just 2%, and then recovered a pulse by the end, when they paid 4%.
This year, stocks have surged and long bonds have done OK. But many experts say that the evidence suggesting that 60/40 is broken is now stronger than ever.
One reason is bonds. Their reputation as a good hedge for stock portfolios is owed to a few recent decades of falling interest rates and inflation. For most rolling 24-month periods since 1945, stocks and bonds have moved together, according to BofA.
However, since 1920, a 60/40 investor has made 8.8% a year, while an all-stock one has made 10.3%. Many argue that the lower returns of 60/40 are worth it for the peaceful sleep it provides, but some analysts call Treasuries “expensive, underwhelming insurance.” For many asset allocators, bonds have taken up 40% of capital but provided just 25% of returns. Now that interest rates and inflation can no longer be counted on to slide, things could look even worse.
Although bonds contributed 4.1 percentage points of yearly returns for 60/40 investors after 1980, when they became a good hedge for stocks, they provided just 1.3 percentage points of return per year during the longer period before that, when stocks and bonds traded together.
It seems that the time has come to reassess our investment strategies and move on from the outdated 60/40 approach.
The Problem with Stocks
Thirty years ago, the S&P 500 index was a relatively safe way to diversify investments. However, times have changed, and correlation between stocks has increased to 50%, sometimes spiking as high as 80%. In fact, only seven stocks contributed to all of this year’s gains. This concentration is reminiscent of periods of market leadership that ended in catastrophic downturns, such as the run for the Nifty Fifty blue chips or the dot-com boom.
According to data from Bank of America, there have been six lost decades for 60/40 investors since 1900, averaging losses of 0.5% a year after inflation. Expert analysts believe another one could be right around the corner.
So what can investors do to stay ahead of the curve? Should they wait for an uncomfortable price drop, or take action now?
A Different Approach
According to Michael Hartnett, chief investment strategist at BofA Securities, the best way to fix a broken 60/40 portfolio is to think outside of the box. Instead of sticking to mainstream asset classes, investors should diversify into alternative sources of yield and growth. By venturing into less-crowded areas like real estate and private equity, investors can reduce risk and increase returns.
It’s time to get a little weirder with your investments. Head to the Star Wars cantina of oddball asset classes and shake some hands…or claws.
Investing Strategies: ETFs for High Yields, Growth, and Value
Looking to diversify your investment portfolio? Consider exchange-traded funds (ETFs) to boost yields and returns. According to BofA Securities, ETFs offer several advantages, including high, stable yields from preferred stocks, relative value from municipal bonds, growth and yield from convertible bonds, and safety from short-term US Treasury bonds.
When it comes to the stock side, equal-weight index funds like the Invesco S&P 500 Equal Weight ETF (RSP) offer double the return of traditional funds that weight companies by market value. Other ETFs to consider include those that track BofA Securities’ favored strategies and sectors: the Vanguard Small-Cap Value ETF (VBR), Pacer U.S. Cash Cows 100 (COWZ), Energy Select Sector SPDR (XLE), SPDR S&P Metals & Mining (XME), and Global X Uranium (URA).
While these specialized funds can enhance returns, it’s important to maintain a balanced allocation and monitor fees, which are generally higher than plain-vanilla index funds. As BofA Securities suggests, these ETFs can be added to your portfolio atop existing index funds. And some niche funds may require ongoing attention to changing conditions.
If you’re considering new investment strategies, ETFs like these offer high yields, growth potential, and value opportunities.
