Investors who follow the popular 60/40 investing strategy may be in for disappointment, according to a recent report from BofA Securities’ Research Investment Committee. The strategy puts 60% in stocks and 40% in bonds, with the idea that the stability of bonds counteracts the volatility of stocks.
However, Jared Woodard, head of the committee, highlights two major issues with this approach: the stock market is currently overpriced, and bonds may not offer the safety they once did.
Woodard suggests that diversifying away from these benchmarks is the only way to achieve the returns investors are accustomed to. He compares it to a scene from Terminator 2, where someone says, “Come with us if you wanna live.”
While this may sound daunting, putting more money into stocks is an option for those with a longer investment horizon.
Last year’s market downturn underscores the risks of this strategy. U.S. stocks lost 18%, while long Treasuries plummeted 31%. With these facts in mind, it may be time for investors to reconsider their investment portfolios to ensure long-term success.
Is the 60/40 Investment Strategy Dead?
As we reach the end of the year, the future of the 60/40 investment strategy is being called into question. While it may have had a resurgence at the end of last year, with bond yields rising to 4%, this year has led many to believe that it may be broken beyond repair.
The reputation of bonds as the perfect hedge for stock portfolios is based on the assumption that interest rates and inflation will continually decline. However, this is no longer a certainty, and for many asset allocators who have invested 40% of their capital into bonds, the returns have only contributed 25% to their total and are becoming increasingly underwhelming.
Historically, since 1920, investors in the 60/40 strategy have seen returns of 8.8% annually, while all-stock investors have enjoyed returns of 10.3%. While this lower return is often seen as worth it for the peace of mind it provides, many now see Treasuries as “expensive, underwhelming insurance”.
While since 1980 bonds have contributed an average of 4.1 percentage points of yearly returns to 60/40 investors, this is not always the case. Before that time, when bonds and stocks moved together, bonds only provided a pitiful 1.3 percentage points of return per year.
Overall, while we cannot definitively state whether the 60/40 investment strategy is dead, it is clear that it is becoming increasingly difficult to rely on bonds as a hedge. Investors should be prepared to look at alternatives to ensure that they can achieve their long-term financial goals.
The Dangers of a Concentrated Stock Market
The S&P 500 index was once a reliable tool for diversification, with stocks averaging just 10% to 12% correlation with each other. However, that has changed drastically over the years. Concentration is high in today’s market, with just seven stocks contributing to all of this year’s gains. This level of concentration evokes memories of past periods of market leadership that ended with big downturns.
According to data from BofA, there have been six lost decades for 60/40 investors since 1900, with an average loss of 0.5% a year after inflation. Are we on the brink of another one now? Michael Hartnett, Chief Investment Strategist at BofA, thinks so.
As he puts it, the S&P 500 could be headed for a “real painful repricing.” Rather than waiting for the inevitable rebalancing to happen, Hartnett recommends making changes now.
So, what should investors do? According to John Woodard, managing director for portfolio strategies at BofA Private Bank, investors should get a little weirder. Instead of sticking with traditional asset classes, he suggests exploring less-crowded sources of yield and growth.
In short, walk into the “Star Wars” cantina of oddball asset classes and shake some hands (or claws).
Investing in ETFs for High Yields and Returns
Looking for investment opportunities that offer both high yields and solid returns? Consider using exchange-traded funds (ETFs) as part of your investment strategy. According to Bank of America (BofA), preferred stocks, municipal bonds, convertible bonds, and short-term Treasury bonds are all excellent options to consider.
For example, Global X U.S. Preferred ETF (PFFD) offers high, stable yields through preferred stocks, while iShares National Muni Bond (MUB) provides relative value with municipal bonds. If you’re looking for growth and yield, SPDR Bloomberg Convertible Securities (CWB) is a great choice. Additionally, consider something short and safe like Schwab Intermediate-Term U.S. Treasury (SCHR) for peace of mind.
On the stock side, BofA recommends equal-weight index funds like Invesco S&P 500 Equal Weight ETF (RSP), which are now priced for double the return of traditional funds that weight companies by market value. Other ETFs that track BofA’s favorite strategies and sectors include 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 it’s worth considering adding these ETFs to your investment portfolio, remember to be mindful of the fees associated with specialized funds – they’re generally higher than plain-vanilla index funds. And some niche funds require ongoing attention to changing market conditions.
Ultimately, finding the right allocation of these ETFs may take some careful thought. Should you decide to pursue this investment strategy, BofA recommends adding these ETFs on top of existing plain-vanilla index funds.
