Looking at the current staying power of certain portfolios, market analysts have some thoughts on how things could be changing. ETF Trends CIO and Director of Research Dave Nadig joined John Hollyer, Principal and Global Head of Fixed Income, Vanguard, to talk all about whether the 60-40 portfolio still works for investors on CNBC’s “ETF Edge.”
While the 60-40 bond split has been around for well over 50 years, going back to many old portfolio theory ideas, many have been questioning whether it’s essential. Can increasingly active retirees stand more exposure to stocks?
Hollyer explained how 60-40 is not necessarily a magic number. The idea is to deliver a diversified portfolio, where asset returns may offset one another, creating a more efficient portfolio.
From there, expected returns are not as high as they once were, as there’s been a 40-year secular decline in rate. However, equity valuations are also high, which still shows the benefits of diversification. Now, with rates having moved up 100 bases in certain sectors at the beginning of the year, a little more of a yield cushion could prove beneficial. This, for Hollyer, shows the diversified portfolio as a continued valuable concept.
A Split from the Split
Nadig championed the idea of thinking of diversified portfolios more broadly. The rule of thumb has often led people down a bad path, with the 60-40 often showing that it’s not the correct allocation for everyone.
Nadig continued: “If you look at what it has actually done, the flows are overwhelmingly showing up in the larger end of the cap sector in the U.S. We’re actually, as a society, increasing our lack of diversification by going more into large caps in the U.S. I think most investors would probably do a good job if they looked at their portfolios, figured out if they actually believe in their portfolios, whether it’s at the stock-end or the bond-end, and start from those first rooms, as I think most investors are pretty barbelled, at this point.”
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