The Globe & Mail: With the Traditional 60/40 Asset Mix in Question, Experts Look to Alternatives
Updated: Mar 17
While the traditional portfolio asset mix of 60 per cent in stocks and 40 per cent in lower-risk bonds has served financial advisors and investors well for many years, some in the investment industry are now questioning its future.
Wall Street firms such as BofA Securities Inc., Morgan Stanley and JPMorgan Chase & Co. have warned lately that this strategy is broken or ailing in an era of near-zero interest rates and will need tweaking to generate sufficient yield.
Alternative investments can potentially make up for shortfalls in this balanced portfolio for some investors, but others may want to consider other options.
Arthur Salzer, Chief Executive Officer and Chief Investment Officer at Northland Wealth Management Inc., agrees the 60-40 portfolio faces headwinds because of low interest rates and stock markets becoming expensive in the developed world.
“If you have a return target of 7 per cent, which many pensions and charities do, that target is probably unrealistic,” says Mr. Salzer, who oversees a multi-family office. “You are probably looking at a 3- to 4-per-cent return, maximum.”
That’s why his firm made the transition to what he calls a “new 60-40 portfolio,” with 60 per cent in publicly-traded securities, which could be stocks and bonds, and 40 per cent in non-public, alternative investments, including private equity, private debt, private real estate and hedge funds.
Mr. Salzer also says that the alternative-asset space comes with risks unless investors can deal with top-quartile managers, but they typically require hefty minimum investments. “We can write $10- to $30-million cheques [as an institutional investor], but we may break that up into individual investments.”
Alternative investments sold by brokerages or exempt-market dealers are often expensive and have fees that can be 50 to 100 per cent higher than offerings sold to institutional investors and will eat away at returns over time, he says.
These investments are also not for everyone. They require proper due diligence because of their complexity, Mr. Salzer says. For example, some private debt and mortgage funds have halted redemptions during the current economic downturn. Their investors can’t get back their money right now, but it’s preferable to selling investments at the wrong time, he suggests.
For investors with a few hundred thousand dollars in investible assets, it’s better to stick with a traditional 60-40 portfolio and invest in high-quality dividend stocks for the equities portion, he says.
In stock market downturns, bonds can also be sold to rebalance a portfolio and then invested in stocks at cheaper prices, he says. “If you buy [securities] when they’re down, that helps the average investor.”
Smaller investors might be able to improve returns by owning a gold-bullion mutual fund and having a small position in a publicly listed bitcoin fund, although this digital commodity is highly volatile, he says. The price of bitcoin surged to more than US$10,000 on Monday for the first time since June.