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Rethinking the 60/40 Portfolio Model

Balanced portfolios with high returns are straying away from the 60/40 model. Hear from our expert on how investors should plan for the future.

By Daniel Kern, CFA

Most investment discussions focus on the outlook for the next quarter or year. Although the focus on the “here and now” is understandable, most investors should measure their time horizon in years or decades. The distinction between short-term and long-term is particularly important today, with near-term “noise” obscuring material changes in long-term economic trends. Given what is likely to be a different long-term investment environment, balanced portfolios comprised of 60% stocks and 40% bonds may provide returns that fall short of the lofty levels reached during the past decade.

Daniel S. Kern is Chief Investment Officer of TFC Financial Management. He is responsible for overseeing TFC’s investment process, research activities and portfolio strategy. Earlier in his career, Dan was head of asset allocation at Charles Schwab Investment Management and managed global and international equity portfolios for Montgomery Asset Management.

Daniel Kern

Stock and bond returns have benefited from globalization, the “peace dividend,” and abundant energy supply. Each “tailwind” for investment returns is likely turning into a “headwind,” at a time in which the U.S., China, and much of Europe will be struggling with an aging population:

Globalization is in decline, with regionalization of supply chains and fragmentation of economic markets a likely consequence.

The loss of U.S. manufacturing jobs, rising income inequality, the COVID-19 pandemic, and U.S./China tensions are among the factors contributing to the backlash against globalization. One lasting consequence of the pandemic will be a focus on supply chain resiliency. Although the “just-in-time” approach to inventories might have been the optimal financial strategy during placid times, the pandemic exposed the need to consider more of a “just-in-case” approach for key elements within the supply chain.

Changes in approach to managing supply chains and stalling of other aspects of globalization are likely to raise costs and create pressure on corporate profit margins. Fragmentation within the global economy is likely to reduce the total addressable market for many companies with global aspirations. Global brands may find themselves with a shrinking opportunity set, however national or regional champions may benefit from a more “localized” market.

The “peace dividend” will diminish as superpower tensions return to prominence.

Russia’s invasion of Ukraine marks the end of a long period in which capital markets valuations and government balance sheets were boosted by relative peace between superpowers. Government spending on defense will likely rise in much of the world as a global arms race looks inevitable. Increased government spending to address energy and food insecurity will create more of a tax on economic growth while sustaining inflationary pressures. A less stable world with higher risk of superpower conflict may cause pressure for equity valuations, particularly when geopolitical tensions are elevated.

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The climate transition will be expensive and disruptive.

Decarbonization will be challenging and create some uncomfortable trade-offs. Persistently high energy prices and increased taxes may be felt in consumer wallets, while periodic service interruptions may be the price of reducing the world’s reliance on fossil fuels. Shortcomings in government policy are likely to be exposed during a transition in which there will be unpleasant trade-offs between present and future stakeholders. Steps by policymakers to slash red tape for permitting will be controversial while speeding financing and providing tax incentives to jump-start the rebuilding of supply chains will be expensive. If the war in Ukraine and sanctions against Russia continue, the U.S. will face some difficult choices between promoting domestic energy production or acquiring more oil from repressive regimes.

The next decade for markets is likely to feature lower returns, higher inflation, and greater volatility. Although inflation will likely decline from recent peak levels, the “new normal” is likely to be above 3%.

With inflation perhaps the greatest threat to returns and monetary policy moving from a loosening to a tightening bias, bonds may not be as consistent a hedge against falling stock market prices. In addition, with bonds still at tepid yields relative to inflation, income-focused investors may need to supplement traditional bond holdings in the search for yield.

Consequently, the oft-heard advice to “stay the course” may be inappropriate for the environment of the coming decade. Long-term investors should think about making some “course adjustments” to add investments that provide incremental diversification, inflation protection, and/or incremental income:

  • Diversify beyond the U.S.: U.S. stock indexes have soundly beaten most non-U.S. indexes during the past decade. The benefits historically provided by international diversification have not materialized during much of the past decade. Although non-U.S. indexes have largely lagged U.S. indexes, many of the best-performing stocks over the last decade have come from outside the U.S. At the stock level, there continue to be compelling opportunities in both developed international and emerging markets. In addition, in a more fragmented economic and trading regime, regional diversification may be more helpful than has been the case during the last decade. 
  • Real estate/real estate investment trusts: Core real estate provides income and potential for capital appreciation. Residential REITs may offer solid protection against inflation, with rent growth likely to outpace inflation thanks to chronic housing underbuilding and growth in household formation. Industrial REITs may also offer inflation protection as companies are shifting away from the “just-in-time” to “just-in-case” models, spurring strong demand for warehousing, fulfillment, and logistics centers. However, industrial REIT valuations have appreciated considerably in recent years, so investing cautiously over time may be preferable to investing all at once. Office and retail REITs remain less attractive due to structural shifts in consumer and worker behavior. 
  • Infrastructure: Toll roads, airports, bridges, utilities, and cell towers are among the investments that offer steady cash flows that adjust upwards over time. Infrastructure investments typically benefit from barriers to entry and offer predictable cash flows that adjust upwards over time. 
  • Farmland and Timberland: Farmland benefits from population growth and reduced arable land; productivity improvements improve crop yields. Farmland is a good source of income and portfolio hedge against rising food costs; demand from China and war in Ukraine are near-term catalysts that may boost demand for U.S. crops. Timberland pricing historically has been more correlated with inflation than with capital markets. Timberland may benefit in the aftermath of a decade of underbuilding and from increased housing demand despite rising mortgage rates. 
  • Treasury Inflation-Protected Security (TIPS): TIPS are indexed to the Consumer Price Index (CPI), providing protection against rising inflation. Shorter-term TIPS may be preferable to longer-term TIPS, as oftentimes interest rate movements on longer-term TIPs can more than negate the inflation protection when rates move significantly higher.

The 60/40 portfolio is not obsolete; traditional stocks and bonds still have a vital portfolio role. However, given changes in the long-term outlook, investors may need to be more creative to achieve the returns required to meet financial goals and manage market volatility. Diversification, inflation protection, and incremental income may be harder to find, but will be available to those willing to do the necessary work.

About the author: Daniel Kern

Daniel S. Kern, CFA®, CFP®, is managing director and chief investment officer of TFC Financial Management. He is responsible for overseeing TFC’s investment process, research activities, and portfolio strategy. Earlier in his career, Dan was head of asset allocation at Charles Schwab Investment Management and managed global and international equity portfolios for Montgomery Asset Management.

He is a board member and chair of the investment committee for the Cambridge Community Foundation, on the board of advisors for the Brandeis International Business School, an independent trustee for Green Century Funds, and on the board of directors of Wealthramp.


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This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct.

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