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24 Jun Is the 60/40 Portfolio an Outdated Strategy?

In a recent article on, Charles Sizemore discusses the current status of the 60/40 traditional portfolio and the impact on investors considering this strategy going forward. A few excerpts:

“The 60/40 portfolio that served retired investors so well over the past 30 years is gone, and it’s not coming back any time soon. As investors, we have to move on.

While it’s true that a simple 60/40 portfolio of the SPDR S&P 500 ETF (SPY) and the iShares Core US Aggregate Bond ETF (AGG) is actually enjoying a nice run in 2016, up a little more than 3% for the year, don’t get used to it. The math simply doesn’t work out going forward.

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%."

So what is an investor to do? Mr. Sizemore presents a few options for investors sharing his viewpoint:

“Consider taking a more active approach to investing.”

This may sound reasonable, but is this realistic for most investors? Research has shown most investors and active managers don’t do well at this. For example, over the 10 year period ending 6/30/15, over 80% of active public equity managers failed to beat their respective benchmark. Individual investors typically don’t fare well either. For the 20 year period ending 12/31/2014, the S&P 500 index returned 9.85%, compared to 5.19% return of the average stock fund investor over the same period according to Dalbar, a Boston-based consulting firm well known for its investor behavior studies. If it’s not likely that an active approach can produce the needed results for most investors (professional or otherwise), then what? Another option mentioned by Mr. Sizemore is adding a liquid alternative robo advisor into the mix. does exactly this, recommending portfolios that incorporate liquid alternatives among diversified equity and fixed income portfolios. For example, the “60-40” equivalent portfolio at targets approximately 50% alternatives, 34% equities, and 16% bonds using ETFs utilizing the constituents within the Endowment Index calculated by Nasdaq OMX®. For the alternatives bucket, we seek to add hedge strategies, private equity, and real assets, such as commodities, real estate and precious metals using ETFs. However, our actual allocation to equities is higher than 34%. This is because some of the alternative asset ETFs we use contain equities themselves. Nevertheless, our portfolios seek to reduce a portfolio’s dependence strictly on equity and fixed income to obtain its objectives. There are some drawbacks. Liquid alternative ETFs often are more costly than cap-weighted equity and bond ETFs. And of course, as with any strategy, there is no guarantee it will reach its objectives. However, given the prospects of the traditional 60-40 portfolio, investors might be well served to at least “kick the tires” on alternatives. The information presented by is not specific to any individual's personal circumstances and should not be taken as personal investment advice. Past performance is no guarantee of future results. Asset allocation and diversification do not ensure a profit or guarantee against a loss. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities or strategies discussed herein. You should consider the risks and costs of investing before making an investment. Our most recent disclosure document, Form ADV Brochure, Part 2A, which provides additional detail regarding the risks and costs of investing, is available upon request. Content is provided for general information and educational purposes based upon publicly available information from sources believed to be reliable but we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.   11870842_788595124586768_1380663872045969532_n  
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