Anyone who has been a wealth management client going back years will have heard of the “classic” 60/40 portfolio split; DIY investors will certainly be familiar too. This stalwart of portfolio strategy simply means a 60/40 combination of stocks and bonds, the equities proportion providing more upside potential and the fixed income proportion offering downside protection.
Though appealing in its simple logic, this model fell somewhat out of favour in recent years, with analyses suggesting losses of over 20% by following it in 2022. This was because the fabled bond ballast didn’t materialise as equities and government bonds in particular fell in tandem.
Although investors might take the 60/40 rule as a good starting point, populating a portfolio with precisely the right stocks and bonds for their profile and needs is of course far more complex
Like all the classics, the 60/40 portfolio may well be due a revival, however, with some experts saying that 2023 could be a great time for investors to construct a traditional 60/40 portfolio and position themselves to benefit from value opportunities in equities and more attractive bond yields. Yet the emphasis must very much be on high-quality equities, they are warning, because of what remains a very uncertain investment environment and the potential for further shocks.
Although investors might take the 60/40 rule as a good starting point, populating a portfolio with precisely the right stocks and bonds for their profile and needs is of course far more complex. This split also risks investors missing out on opportunities in alternatives, for instance, which might hold out the prospect of very attractive returns and also robust risk management due to their uncorrelated behaviour compared to traditional assets. In short, a 60/40 portfolio might be readily understood, but it is not necessarily easy to implement optimally – nor may it represent a comprehensive solution.
Although a 60/40 split of equities and bonds may be considered a good basis for a portfolio, many would argue that today’s environment calls for far more sophisticated asset allocation strategies that encompass alternatives. Commodities such as gold and energy are of great interest currently, for example, but a whole range of alternatives could well be justified in your holdings.
Minimising risk and maximising reward depend on intelligent diversification across asset classes, markets, currencies and instruments, so while you should certainly keep things simple where you can, be careful not to over-simplify. Whether you are a DIY investor at present or already have a wealth manager, it might be a very smart move to have fresh eyes on your portfolio to see if it might be further optimised.
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