The 60/40 is Dead ... But Long Live Modern Portfolio Theory

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The 60/40 portfolio, comprised of 60% equity benchmarks and 40% bonds, has remained a cornerstone of the wealth management industry for many decades. Its enduring value and efficiency as an optimal allocation strategy – i.e., the highest return for a certain level of risk – have solidified its status as a benchmark for moderate-risk investment strategies that can be tailored into variations, e.g., conservative (or 20/80) or aggressive (or 80/20) portfolios. Yet, the recent surprising and disappointing performance of the strategy has triggered a fierce debate over its long-term value. This debate however misses the broader lesson. While the 60/40 cookie-cutter practice is indeed obsolete, the criticism over its validity has, if anything, renewed interest in efficient and optimal portfolio construction in line with Markowitz’s teachings and at the core of the 60/40 approach itself!

With today’s avalanche of free data, computing power, AI, digital platforms, financial innovation, and availability of low-cost ETFs and zero-commission brokers, there are powerful tools to build highly diversified and customized portfolios closely matching the investor’s risk tolerance profile and goals... a quantum leap from the cookie-cutter 60/40 strategy and its indiscriminate conservative, moderate, and aggressive variations.