Re-Evaluating the Traditional Investment Portfolio

I’ve long argued that buy-and-hold investors should avoid the traditional portfolio, which is 60% stocks and 40% bonds. Here’s an article making the same argument but using different reasoning. He says investors can’t expect anything like the returns the traditional portfolio’s delivered over the last 30 years. They need to look elsewhere for decent returns.

Let’s play with the numbers. Back in 1980, the 10-year Treasury yielded a fat 11.1%, and stocks sported an earnings yield (calculated as earnings / price, or the P/E ratio turned upside down) of 13.5%. This implied a back-of-the-envelope portfolio return of about 12.5% per year going forward, and for much of the 1980s and 1990s that proved to be a conservative estimate. Both stocks and bonds were priced to deliver stellar returns, and both most certainly did.

But what about today? The 10-year Treasury yields a pathetic 1.6% and the S&P 500 trades at an earnings yield of just 4%. That gives you a blended portfolio expected return of an almost embarrassing 2.8%.