Is 70/30 the New 60/40?

Is 70/30 the New 60/40?

Since the 2008 Financial Crisis, many prognosticators have prematurely anticipated the end of the 60/40 portfolio—the well-established strategy of investing 60% of your portfolio into stocks and the remaining 40% into bonds. In our view, their inopportune call was shaped by the extreme nature of that experience, which led to widespread forced liquidations. The “margin call” environment that ensued caused a breakdown of the correlation between asset classes, eliminating the benefits of a diversified portfolio just when investors needed it the most.

We never believed that it was appropriate to extrapolate the 2008 experience as a reason to abandon the 60/40 portfolio due to the simple fact that this investment approach is not a short-term trading scheme. Rather, it is a long-term investment approach, and as a result, it is hard to make the case that this strategy failed the long-term investor. Instead, over the decade that followed, this mainstay allocation continued to provide exceptional outcomes for investors.

Today however, there are legitimate reasons to question the future effectiveness of the 60/40 portfolio for many investors. In the wake of COVID-19’s distortion of the financial markets, specifically its impact on the fixed income market, the available yields on bonds have fallen precipitously. Given that one’s starting yield is a good predictor for what one can expect to earn over a bond’s life, there are now serious return considerations for portfolios that are primarily allocated towards bonds. So, what do you do now?

The answer depends on your own unique circumstances. If you are an investor in your 30s, 40s or even 50s—with a long time-horizon, a healthy ability to tolerate risk, and limited cash needs from your portfolio—it is worth considering whether a higher allocation to stocks would be appropriate for you, particularly given our house view that we are at the start of a new economic cycle. On the other hand, if you are a retiree—with a lower tolerance for risk or a current need to use your portfolio to supplement your lifestyle—then your overall allocation to bonds might not need to change much, for capital preservation purposes alone, since the last thing you want to be doing is potentially drawing upon a stock portfolio when it is simultaneously declining.

Whether you can accept more stock market exposure or not, Sand Hill seeks to optimize your portfolio for this new market reality. We believe our clients are well-served by embracing a globally diversified portfolio as well as a disciplined approach to rebalancing as circumstances merit—as there is more to our 60/40 portfolio than simply U.S. stocks and Treasury bonds. The arrival of viable vaccines is likely to be a catalyst for underperforming value stocks around the world. Additionally, international stock markets tend to be more cyclical in nature and will likely benefit from a weakening dollar. In your bond portfolio, we remain committed to high-quality investments but see value in diversification away from government bonds as well as internationally; and we are closely monitoring interest rate exposures. And finally, we believe that alternative investments will deliver superior outcomes relative to bonds in the coming period. 

So while we continue to believe it is still premature to call for the end of the 60/40 portfolio, we do believe that the bond market will be a trickier place to navigate for a while—and that means that investors should consider their own circumstances, talk to their Wealth Manager, and make the appropriate adjustments to their portfolios to stay on track to meet their overall goals.

Articles and Commentary

Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


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