The New 60/40 Portfolio – Alex Steele
The 60/40 portfolio did what it was supposed to do. It delivered decent returns with lower than market drawdowns.
“What has worked will continue to work”
a behavioral misstep known as recency bias.
The New 60/40 Portfolio
For almost a decade, from 2000 – 2009, investors experienced a period of low returns in their classic 60% equities and 40% bonds portfolio. To the delight of many, the tides turned in 2011, with investors becoming accustomed to seeing comfortable, low double digit returns in the classic 60/40 portfolio, while riding one of the longest and most profitable bull markets in history.
Over the last two years, the investment landscape has dramatically changed once more. Year to date, most major asset classes are now in negative territory, including bonds and other safe haven assets, which have historically been a safety net when equities were taking a hit. Investors are now faced with the million-dollar question – how does one obtain real diversification while still reaching for yield? In order to answer this question, fiduciaries must start thinking creatively going forward.
This is where alternative assets come into play.
Although the term “Alternatives” is often misunderstood due to a lack of clarity around what exactly falls within this category, it is, at its core, quite simple. Alternatives encompass real assets, hedge funds, private equity, and structured products. These can be compared to equities, typical mutual funds, public equities, and simple derivatives, respectively. A portfolio with a thirty percent allocation in alternatives is expected to positively change that portfolio’s risk/return profile by potentially reducing downside volatility, increasing returns, or both. The market is seeing a shift from the traditional 60/40 portfolio to those with a heavier allocation toward alternatives. In fact, the Canadian Pension Plan has increased its weighting in alternatives, including real assets, from approximately 5% in 2006 to more than 18% in 2022.
One alternative asset subclass which has historically performed very well in inflationary environments is private residential real estate. As a whole, real estate is the third largest asset class in the United States after fixed income and equities, with around 50% of global wealth allocated to this subclass. It is often overlooked and misunderstood by the average allocator, and we are here to demystify it.