RIP: Inflation Comes for This Beloved Portfolio Strategy
Amanda Heckman|October 16, 2021
If you need more proof that the old way of doing things is dead… we’ve got it.
Inflation has come for the once-revered 60/40 portfolio.
This model, which says that a portfolio should be made up of 60% stocks and 40% bonds, was created to provide growth through stocks while keeping volatility at bay with bonds. It has been the go-to model for many financial advisors from the 1950s to, sadly, today.
The idea behind the model is that stocks and bonds are supposed to be inversely correlated… so when the stock market heads south, bonds are there to pick up the slack.
But with interest rates near zero, bonds have not been able to hold up their end of the bargain… and now they’re bringing down portfolios from the inside out.
In September, a Bloomberg model tracking a portfolio of 60% stocks and 40% fixed-income securities suffered its worst monthly drop since the pandemic started in early 2020.
With inflation raging, bond yields inched higher in response to speculation that the Federal Reserve will seek to slow down the economy and raise rates. Even so, even the most bullish of bond wonks don’t predict a “return to normal” anytime soon. That’s trouble for bondholders. Bond prices were pushed lower as yields inched higher… meaning the value of bonds held in portfolios took a hit.
But that’s not all… Inflation woes across the economy, combined with the threat of rising rates, supply chain issues and poor employment numbers, sent stocks lower for the month as well. The market ended September down 4.8%, its worst month since March 2020.
The combination of falling equity and bond prices “is a problem for all investors and not only asset managers,” Seth Bernstein, president and CEO of AllianceBernstein, told the Financial Times.
Indeed, this double whammy has more folks than ever sounding the death knell for this supposedly safe portfolio strategy.
Bank of America called it “the end of 60/40.” Goldman Sachs said losses from such portfolios could swell to 10%. Deutsche Bank strategists said a shift in the stock-bond relationship may force money managers to adjust their thinking.
To that we say, well, duh.
The days of high-yielding bonds are long gone. Continuing to use a strategy that relies on them is foolish. And costly.
That’s why Andy unveiled his Modern Asset Portfolio (MAP) theory. It’s the basis for his model portfolio in Manward Letter.
It abandons the ideas that might have worked decades ago – like the 60/40 portfolio – and brings into focus what’s working TODAY.
Our model uses the economics of the day to ensure our portfolio lies as close to the top of that table as possible.
It does so using – oh boy – interest rates. By simply adding a key variable to the equation, we can shun the worst asset classes and overweight the best ones.
In our current case – with interest rates near record lows – we have zero allocation to bonds and an overweight stance (10%) on crypto.
Indeed… it’s been a great year.
Will we always avoid bonds and their near-zero yields? Will we always go hog-wild on crypto?
No. Absolutely not. As rates climb, our Manward Letter readers know exactly where our portfolio will head next.
It’s silly – or flat-out lazy – for anybody to stand on a stage and point to one “timeless” model… especially a model that doesn’t account for the many tools available to today’s investors.
The investment industry is finally realizing it must do something beyond putting trillions of mutual fund, pension fund and retirement fund dollars into a strategy that can’t keep up.
But Manward is well ahead… with a portfolio that is built to adapt as our economy and the markets change.
Amanda Heckman|Editorial Director
Amanda Heckman is the editorial director of Manward Press. With unrivaled meticulousness, she has spent the past dozen or so years – give or take a few sabbaticals – sharpening Andy’s already razorlike wit. A classically trained musician and a skilled writer in her own right, Amanda takes an artistic approach to the complex world of investing. Her skill has led her to work with numerous bestselling authors, award-winning financial gurus and – lucky for us – the fine folks at Manward Press.