Liquid Alternatives: “Replace The Flawed 60/40 Approach With A Multi-Asset Portfolio” – 7IM
The [60:40] no longer lives up to its promise of a portfolio balanced between the security of bonds and the growth from equities.
According to Matthew Yeates, Head of Alternatives and Quantitative Strategy, 7IM, current record low yields on bonds have made the [60:40] investing mantra an “anachronism.” Bonds provide neither the returns nor the benefit of diversification as a foil to the riskier and higher growth equity component in the portfolio. The solution is to incorporate alternatives into the investing mix. (IFA Magazine)
The [60:40] is no longer what it used to be
“The 60/40 portfolio has been a great place to be over the last decade but looking forward, and with an eye on what’s happened in 2020 in particular, we think investors should be looking for more now from their portfolios,” Yeates says. “For a balanced portfolio, we would currently expect to see an allocation of circa 15% in alternatives, a split which will likely only increase over time when you consider where bonds yields and equity markets are currently.”
Bond yields, which were positioned around multi-decade lows, have now started to creep up. This has triggered a sell-off in bonds. This is happening when a correction in stocks, which have regularly been scaling new all-time highs, could also be around the corner.
Effectively, bonds and stocks now seem to be joined at the hip, meaning the diversification and safety-net justifications for bonds no longer apply.
7IM: Liquid alternatives the way forward
“Be it diversification through proper strategic asset allocation, looking at regions like emerging markets or diversification through alternatives, these should all be differentiating parts of robust multi-asset investing going forward, which should replace the increasingly flawed 60/40 approach,” advises Yeates.
Specifically, Yeates recommends using liquid alternatives – involving long/short strategies, emerging markets, and property, for example – to provide a better overall risk/reward profile compared to bonds over the next decade.
“A genuinely diversified multi-asset portfolio has a much clearer role in today’s prevailing environment of low bond yields, negative debt piles, and returning inflation,” he says. “Our answer to the problems facing 60/40 portfolios is, therefore, not to build them.”
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