Macroeconomic uncertainty has sparked questions over the durability of the traditional 60/40 portfolio—highlighting why investors may want to add alternative investments to the mix.
- The 60/40 portfolio today – Inflation poses a challenge to the traditional stock-bond portfolio. The diversifying nature of the two assets can be sensitive to the level of inflation, which makes rethinking portfolios more critical than ever.
- Rebuilding resilience – A sensible evolution of portfolio construction can include complementing traditional asset classes with alternative sources of return that provide additional diversification.
- Three Ds of alternative diversifiers – When looking for liquid alternatives that can improve portfolio resilience, we believe buyers should look for diversification, durability, and defensiveness.
The 60/40 today
The foundational 60/40 portfolio, where 60% is invested in stocks and 40% in bonds, is the initial starting point for many portfolios. The exact proportion of the mix is often adjusted based on an investor’s time horizon, risk tolerance, and financial goals, but the simple, proportional stock-bond combination is core to what is considered by many to be a “diversified” portfolio.
The main premise for the combination is that when growth assets, like stocks, sell off due to economic slowdowns, fixed-income assets like bonds typically appreciate. While stocks tend to suffer in a recession due to lower earnings, bonds can rally because central banks typically cut interest rates to support the economy. When central banks ease policy, bond yields drop and bond prices rise. This dynamic means that bonds can provide a shock absorber in the portfolio, helping to cushion overall returns when stocks are falling.
Post-pandemic, the dynamics underpinning the “diversified” 60/40 portfolio have changed. Figure 1 illustrates how over the last two years, the 10-year U.S. Treasury has, on average, delivered negative returns on equity down days. That dynamic is a stark contrast from the diversifying returns of bonds that many investors relied on in the 2000-2007 and 2008-2020 time periods.