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End of the Traditional Balanced Portfolio

Last update on: Feb 02 2017

Longtime readers know I’ve never been a fan of the traditional balanced portfolio, which generally is 60% stocks, 40% bonds. People have some variations, but there isn’t much practical difference. Among the problems with the traditional portfolio is that it really isn’t diversified. About 90% of the portfolio’s risk, volatility, and returns are tied to the stock market indexes. The bonds provide some diversification, but you’re basically investing in stocks. You’re making a bet that growth will increase and inflation will be stable or falling. I prefer a more diversified portfolio if you want to be a buy-and-hold investor. I provide such a portfolio in my “hedge fund” mutual fund portfolio.

Every year I see  more support for my view of the traditional balanced portfolio. Here’s the most recent entry. The problem identified in this article is that interest rates on bonds are so low. They don’t provide any yield now and limited opportunity for capital gains. Plus, when interest rates rise they’ll deliver big losses as rates make their way back up to normal levels. If rates exceed historic averages, the losses will be even deeper.

Indeed, a 2012 study by Chris Brightman, head of investment management at Research Affiliates, a Newport Beach, Calif., firm that develops allocation strategies, predicts that a 60-40 portfolio will yield a 4.4% annual return from 2011 to 2020. If that turns out to be true, it would mark one of the worst decades ever for the strategy. In the periods 1981-1990 and 1991-2000, in contrast, the strategy yielded annual returns of 14.3% and 14.4%, respectively.

Such a slowdown could cause problems for adherents, especially when it comes to retirement planning. “You should not plug in an assumption that [a 60-40 portfolio is] going to return 7% or 8%,” Mr. Brightman says.



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