All good things don’t necessarily need to come to an end, but the 60% equity/40% fixed income portfolio structure that was such a cornerstone of investing for decades may be on borrowed time.
At the very least, evidence is mounting that the 60/40 model is in need of rejuvenation and could prove vulnerable to inflation, which is one of the foremost issues on the minds of advisors and clients today. Advisors looking to refresh the 60/40 proposition may want to consider Siegel WisdomTree Portfolios, which includes two model portfolios — one of which has no bond exposure at all.
“WisdomTree collaborated with our Senior Investment Strategy Advisor—Dr. Jeremy Siegel, Professor of Finance at Wharton School—to construct portfolios designed to challenge the traditional 60/40 portfolio approach by improving the current income generation and longevity profiles. These portfolios include a Global Equity model and a multi-asset ‘Longevity’ model,” said WisdomTree.
With inflation looking more persistent than transitory, advisors may want to evaluate the Global Equity Model because it’s entirely allocated to equity-based exchange trade funds, indicating that it has some inflation-fighting potential. That’s important because some on Wall Street believe that inflation will punish 60/40, particularly the “40.”
“The recent synchronized sell-off in equities and Treasuries was likely just the beginning of what’s come for the popular 60/40 stock-bond portfolio strategy, a growing chorus of Wall Street strategists warn,” reported Lu Wang for Bloomberg. “Bank of America Corp. called it ‘the end to 60/40’ while Goldman Sachs Group Inc. said losses from such portfolios could swell to 10%. Similar alarms also rang at Deutsche Bank AG, where strategists including Jim Reid said a shift in the stock-bond relationship may force money managers to adjust their thinking.”
Some strategists believe that equities will be vulnerable to persistent inflation, too. There were signs of that in September when the S&P 500 declined on a monthly basis for just the second time this year.
“Now, with inflation fears raging, the worry is the Federal Reserve will seek to slow down the economy and rising rates will spell trouble for both bonds and stocks. September offered a taste of the pain, with a Bloomberg model tracking a portfolio of 60% stocks and 40% fixed-income securities suffering the worst monthly drop since the pandemic started in early 2020,” according to Bloomberg.
However, WisdomTree’s Global Equity model could prove durable because several of its components are dividend ETFs, including the WisdomTree U.S. MidCap Dividend Fund (NYSEARCA: DON) and the WisdomTree U.S. SmallCap Dividend Growth Fund (NasdaqGM: DGRS). DGRS and DON are dividend growth strategies, which is relevant in inflationary times because payout growth historically tops inflation.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.