The 60/40 investment portfolio

Generally, it translated to mean 60 per cent stocks and 40 per cent bonds. The growth characteristics of stocks would reward investors over time and the defensive characteristics of bonds would dampen the volatility of the stocks and provide the investor with a smoother wealth accumulation journey.

Today we usually understand a 60/40 portfolio to mean something more complex. It has come to mean 60 per cent growth assets and 40 per cent defensive assets, and these definitions are to some extent fluid.

Growth assets are those whose price investors expect to increase over time and defensive assets are those where the return is predominantly by way of regular income with price remaining largely constant.

The transition of the 60 per cent from stocks to growth assets has incorporated numerous growth asset classes or sub classes.

These include listed and unlisted property and also growth alternatives such as infrastructure, utilities, commodities, agriculture, hedge funds, private equity, and even distressed debt is an asset class that sometimes seeks to alchemise a defensive asset into a growth asset.

Meanwhile, the 40 per cent in bonds has transitioned to include cash, term deposits, short-term annuities, corporate credit, private debt, high yield and listed hybrids as well as government and semi-government bonds.

There have been many voices recently suggesting the 60/40 portfolio is dead and past its use-by date. A common view is that investors need more growth and less defence. Some of these voices have been inspired by the poor returns for traditional bond assets which have arguably reached the end of their bull run, with unattractive returns in prospect as interest rates inevitably begin to climb again.

While official rates remain largely stuck at multi-decade lows, market rates have begun rising quite sharply, signalling a change in expected returns.

In my world there are no default portfolios because each investor’s objectives and risk tolerance are different. There are 100 per cent growth portfolios and 100 per cent defensive portfolios and everything in between.

In practice, the average private investment portfolios does sit somewhere near 60/40. And for long-term horizon savers, such as in the superannuation sector, the average is closer to 70/30.

Why is that? I could delve into investment mathematics which can still support the two-thirds growth, one-third defensive split as somewhere near optimal. Opposing views can equally be supported on capital asset pricing and valuation models and the mathematics that ensue from them.

But to take a different tack we might also look backwards to one of the earliest ever documented investment strategies from the Jewish texts of The Talmud which date back at least 15 centuries. In these texts a person was advised to invest their money “one-third in land, one-third in business, and the remaining third in cash”.

Another common translation is, “Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep by him in reserve”.

A modern version of this strategy would be one-third in real assets such as property, one-third in shares and one-third in bonds or other liquid assets (which even in rising rate markets can still be skilfully deployed).

The details of such a strategy would see real assets include commercial property such as office, retail and the like, infrastructure, commodities and agriculture. It would see shares spread across sectors, geographies and public and private markets. And it would see fixed interest assets also across the risk and currency spectrum and in public and private markets.

These strategies have been tested and found to deliver almost the same high returns as pure share portfolios but, unlike pure share portfolios, they bring with them lower volatility and lower risks of periodic falls in value.

When I look at the market returns, volatility and falls in value up to the most recent quarter at September 30, I really can’t see that anything has changed.

Somewhere between 60-70 per cent growth not only looks and feels right, it continues to get great results.

No surprise then that at last count by far the largest segment of the 650 portfolios I come across (48 per cent) are between 60-70 per cent growth portfolios, and by dollars invested the percentage in 60-70 per cent growth is not far below at 44 per cent.

Calling the demise of what I prefer to call the 65/35 growth portfolio is both premature and very likely completely incorrect.

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