Is the 60/40 portfolio allocation strategy being killed?

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CULater
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Is the 60/40 portfolio allocation strategy being killed?

Post by CULater » Mon Sep 16, 2019 8:02 am

This commentary from John Mauldin discusses the increasing likelihood that the portfolio strategy that we've followed in the past may be "broken" and won't meet our expectations going forward. And he's not the only voice. Bogleheads philosophy under attack. I must admit that I hear the choir warming up and wonder if it's time to start thinking out of the box or at least taking a peek.
Many long-term investors assume stocks will give them 6–8% real annual returns if they simply buy and hold long enough. Pension fund trustees hire consultants to reassure them of this “fact,” along with similar interest rate and bond forecasts, and then make investment and benefit decisions.

Those reassurances are increasingly hollow, thanks to both low rates and inflated stock valuations, yet people running massive piles of money behave as if they are unquestionably correct.
The “logic” of 60/40 is that it gives you diversification. The bonds should perform well when the stocks run into difficulty, and vice versa. You might even get lucky and have both components rise together. But you can also be unlucky and see them both fall, an outcome I think increasingly likely. Louis Gave wrote about this last week.

Historically, the optimized portfolio of choice, and the one beloved of quant analysts everywhere, has been a balanced portfolio comprising 60% growth stocks and 40% long-dated bonds. Yet recently, this has come to look less and less like an optimized portfolio, and more and more like a “dumbbell portfolio,” in which investors hedge overvalued growth stocks with overvalued bonds.

At current valuations, such a portfolio no longer offers diversification. Instead, it is a portfolio betting outright on continued central bank intervention and ever-lower interest rates. Given some of the rhetoric coming from central bankers recently, this is a bet which could now be getting increasingly dangerous.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by ionball » Mon Sep 16, 2019 8:10 am

"At current valuations, such a portfolio no longer offers diversification."

Is diversification a product of valuations? Please educate me because I don't understand the relationship.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by greg24 » Mon Sep 16, 2019 8:14 am

This time it's different.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by JoMoney » Mon Sep 16, 2019 8:22 am

... a balanced portfolio comprising 60% growth stocks and 40% long-dated bonds...
Huh :confused that's not exactly the way I usually see it framed.

Regardless, there are good reasons to expect lower future returns, but that doesn't mean there's a better portfolio recommendation.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by CULater » Mon Sep 16, 2019 8:22 am

ionball wrote:
Mon Sep 16, 2019 8:10 am
"At current valuations, such a portfolio no longer offers diversification."

Is diversification a product of valuations? Please educate me because I don't understand the relationship.
Seems clear to me in the quote. The assertion being made is that both stocks and bonds are at historically high premiums and are likely to both fall or perform poorly going forward; thereby nullifying the historically low or negative correlation between these two asset classes, particularly during stock bear markets. What's the next question?
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by jrbdmb » Mon Sep 16, 2019 8:31 am

I think these lines from the article are key:
If you want capital gains, the opportunities will be there… but not in a passive index strategy. You will need active management and expert managers.

If your investment advisor simply has you in a 60/40 portfolio and tells you that “we are invested for the long term and the market will come back,” pick up your capital and walk away.
This article recommends avoiding index funds and advocates both stock picking and market timing. Good luck with that.
Last edited by jrbdmb on Mon Sep 16, 2019 8:36 am, edited 1 time in total.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by wolf359 » Mon Sep 16, 2019 8:35 am

This opinion article sort of meanders all over the place. He talks about Trump economic policy, iPhones, growth stocks, interest rates, index investing, and "black hole investing" (he's being slangy-- it makes sense in context.) However, his primary point isn't about the 60/40 portfolio allocation. It's about the need to stop buy-and-hold investing, leave passive strategies behind, and get back into active investment management. His conclusion:
Friends don’t let friends buy and hold. I can’t say that strongly enough. You must have a well thought out hedging strategy if you’re going to be long the stock market. If your investment advisor simply has you in a 60/40 portfolio and tells you that “we are invested for the long term and the market will come back,” pick up your capital and walk away. I can’t be any more blunt than that.

Every investment advisor, including me, uses these words in their disclosure documents: Past Performance Is Not Indicative of Future Results. I think that has never been more true than for the coming decade. The 2020s will be more volatile and difficult for the typical buy-and-hold index fund investor than anything we have seen in my lifetime.

Active investment management is not particularly popular right now since passive strategies have outperformed. But I think that is getting ready to change. You should start, if you’re not already, investigating active management and more proactive investment styles. You will be much happier if you do.

Personally, I am still happily invested in a number of hedge funds but the strategies I select are limited, as many hedge fund styles have seen great challenges in producing acceptable risk/reward returns.

That is getting ready to change. I believe some hedge fund styles like the distressed debt, fixed income and event driven spaces are going to be very attractive. Who knows? Maybe even long/short funds will eventually find their former mojo.

At the economic event horizon, we all need to become black hole investors. Relying on past performance as the tectonic plates shift underneath us, as the central bank black holes begin to suck historical performance into their maws, we must look forward rather than backwards to design our portfolios.

At the event horizon, as the Jefferson Airplane song of my youth says, logic and proportion are fallen sloppy dead. You better feed your head with much more forward-looking strategies.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by 4th and Inches » Mon Sep 16, 2019 8:36 am

"Helping advisors enable clients to achieve their financial goals," is the motto at the top of the website. Could the article be ammo to keep people out of indexing and get them into more costly options?

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Dave55 » Mon Sep 16, 2019 8:43 am

I have 2 friends who read John Mauldin and they tell me he is a perma bear. He also used and may still plug Altegris Mutual Funds, most of them alt's with very high expense ratios.


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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by sambb » Mon Sep 16, 2019 8:49 am

savings rate is far more important, and tax deferral, managment of one's career and promotions/excellence at work to have capital to invest.
After all of that, then allocation and investments,and eventually expense ratios.

Probably cant retire at 50, even if stocks did 10% a year, if you start saving at 40 at $5000 per year with a dead end career with layoffs, and poor tax management.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by livesoft » Mon Sep 16, 2019 8:51 am

The comments in this thread remind of the old adage:

"We turn your money and our experience into our money and your experience."
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by oldcomputerguy » Mon Sep 16, 2019 8:53 am

An absolute fear-mongering piece, chock full of disaster scenarios and claims that active management and stockpicking are the only things that will save us.

Ignore the noise.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by rascott » Mon Sep 16, 2019 8:54 am

I'd suggest one goes and looks at the history of this guy. He's been talking like this for a couple decades.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Dave55 » Mon Sep 16, 2019 8:55 am

livesoft wrote:
Mon Sep 16, 2019 8:51 am
The comments in this thread remind of the old adage:

"We turn your money and our experience into our money and your experience."
PRICELESS and RIGHT ON THE $$

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by firebirdparts » Mon Sep 16, 2019 9:05 am

Did he mention the customer’s yachts?
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Jack FFR1846 » Mon Sep 16, 2019 9:10 am

If your investment advisor simply has you in a 60/40 portfolio and tells you that “we are invested for the long term and the market will come back,” pick up your capital and walk away. I can’t be any more blunt than that.
......and do what? Invest in pork bellies? Buy shipping futures? Corner the market on tin? Or just hold cash?
If you want capital gains, the opportunities will be there… but not in a passive index strategy. You will need active management and expert managers.
Because active managers have consistently outperformed passive investors? Oh wait....they haven't. So with a changed market, these managers will magically know how to return more than the market....for sure? Ok...so let's write the guaranty contract that if the manager fails to beat a specific index, net fees, they personally write a check to make up the difference.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by HomerJ » Mon Sep 16, 2019 9:16 am

CULater wrote:
Mon Sep 16, 2019 8:02 am
Many long-term investors assume stocks will give them 6–8% real annual returns if they simply buy and hold long enough.
No one here is counting on that. I still think we're likely to get around that (long-term), but no one should be counting on it.
Historically, the optimized portfolio of choice, and the one beloved of quant analysts everywhere, has been a balanced portfolio comprising 60% growth stocks and 40% long-dated bonds.
What are "long-dated" bonds? My fixed income money is in Total Bond Market (5-6 year duration), and 5-year CDs, and short-term money market funds.

Many people here use TBM.
At current valuations
<Yawn>

They've been bleating about valuations since 1992.

Now all that said, I'm currently 50/50 and will be 40/60 in retirement.

But I don't think 60/40 is "dead".
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by aristotelian » Mon Sep 16, 2019 9:20 am

He may be right that 60/40 has lower expected returns due to high valuations. I am not convinced there is a better alternative.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Stormbringer » Mon Sep 16, 2019 9:35 am

The very notion of lending 40% of my money for free or worse (at least in real terms) really makes me scratch my head.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Mon Sep 16, 2019 9:45 am

The 'active management' salespeople advocates have been doing everything they can for years now to staunch the flow of capital from actively managed funds to passively managed funds. This seems like little more than the latest round of their attacks.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by rich126 » Mon Sep 16, 2019 9:53 am

Is this the guy (John Mauldin) who always seem to be doom and gloom? Its been a while (~2008) since I read his stuff but it seemed like everything was negative and I quickly tired of reading him.

As to 60/40, well, maybe. If interest rates are providing near negative real returns and the US doesn't maintain a strong economy then 60/40 is probably not going to work. Of course if you recognize it early you can always change and adapt. People have had it pretty easy the last decade.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by CULater » Mon Sep 16, 2019 10:10 am

I think the other part of the argument is that both stocks and bonds are "hanging from the same Fed (Central Bank)". What the Central Bank does is having the same effect on both bonds and stocks. They raise rates and both bonds and stocks tank, or they lower rates and both bonds and stocks elevate. Since bond rates are so low and expected stock returns are also so low, the market is hanging on what the Central Bank does. This "common factor" is causing bonds and stocks to move together and seems to be the main factor in causing those movements of any significance. This may be undermining the historical diversification benefit of the 60/40 portfolio. There seems to be some merit in this perspective, IMO.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Mon Sep 16, 2019 10:17 am

CULater wrote:
Mon Sep 16, 2019 10:10 am
I think the other part of the argument is that both stocks and bonds are "hanging from the same Fed (Central Bank)". What the Central Bank does is having the same effect on both bonds and stocks. They raise rates and both bonds and stocks tank, or they lower rates and both bonds and stocks elevate. Since bond rates are so low and expected stock returns are also so low, the market is hanging on what the Central Bank does. This "common factor" is causing bonds and stocks to move together and seems to be the main factor in causing those movements of any significance. This may be undermining the historical diversification benefit of the 60/40 portfolio. There seems to be some merit in this perspective, IMO.
Even if that is true, how is active management the solution?
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Muffin Master » Mon Sep 16, 2019 10:38 am

My unqualified 2 cents worth:

I have always considered John Maudlin a perma bear due mainly to massive unsustainable sovereign debt issues.

"The sword of Damocles" investment strategy might be a better description he is proposing. Most of the major developed world has a 10 yr rate at or below 0 with all (I think) have effect rates near 0 or less. I think that is common knowledge now. At this point a bond investment is looking a lot like the greater fool philosophy of trading. I think the fool philosophy has one big problem, eventually you run out of buyers/fools ("A fool and his money ..."). So what do you do to counter equity risk ... go down the curve and buy your favorite dictators, Frontier or EM sovereign debt. Maybe some exotic of CDOs or puts and call combinations. I'm a little slow with those tools, they sound too much like vaporware for me. Gold has a history of some risk protect and it sound like its storage fees might be cheaper than the negative rates or effect rates for that matter. This might be the world John Mauldin might be recommending for the prudent retirement investor.

or Bogle just might have something too.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by nedsaid » Mon Sep 16, 2019 11:00 am

My take is that given currently high valuations for stocks and bonds that it is likely that future returns from both will be below historical averages. I say "likely" because predictions, as HomerJ has kept bringing up, keep being proven wrong by actual market performance. He has wondered if something is wrong with the valuation benchmarks and I am wondering that too. Pretty much wondering is something is going on out there that the accountants are not capturing but that the markets are aware of. Pretty difficult to put a value on intangible but very important assets such things as the going concern value of a business, the value of intellectual property, the value of a brand and customer loyalty.

I keep thinking of the old Warren Buffett quote. When asked if stocks were expensive, he replied, "Yes, but not as expensive as they look." So while we can argue about stock valuations and future expected returns from stocks, we do know that interest rates are at historically low levels. You can't get a 6% yield from Intermediate Term Investment Grade bonds anymore, that alone should depress returns from balanced funds. Sadly, real yields on bonds, that is yields after inflation, has also fallen. Historically, 30 year US Treasuries would yield 3% above inflation, I think we might be lucky to get 0.50% today. That is the real story here.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by rascott » Mon Sep 16, 2019 11:07 am

nedsaid wrote:
Mon Sep 16, 2019 11:00 am
My take is that given currently high valuations for stocks and bonds that it is likely that future returns from both will be below historical averages. I say "likely" because predictions, as HomerJ has kept bringing up, keep being proven wrong by actual market performance. He has wondered if something is wrong with the valuation benchmarks and I am wondering that too. Pretty much wondering is something is going on out there that the accountants are not capturing but that the markets are aware of. Pretty difficult to put a value on intangible but very important assets such things as the going concern value of a business, the value of intellectual property, the value of a brand and customer loyalty.

I keep thinking of the old Warren Buffett quote. When asked if stocks were expensive, he replied, "Yes, but not as expensive as they look." So while we can argue about stock valuations and future expected returns from stocks, we do know that interest rates are at historically low levels. You can't get a 6% yield from Intermediate Term Investment Grade bonds anymore, that alone should depress returns from balanced funds. Sadly, real yields on bonds, that is yields after inflation, has also fallen. Historically, 30 year US Treasuries would yield 3% above inflation, I think we might be lucky to get 0.50% today. That is the real story here.
Stocks have returned "below average" for 20 years.... will we ever return to long term "average"?

Stocks don't look that expensive to me, in this rate world.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by nedsaid » Mon Sep 16, 2019 11:12 am

rascott wrote:
Mon Sep 16, 2019 11:07 am
nedsaid wrote:
Mon Sep 16, 2019 11:00 am
My take is that given currently high valuations for stocks and bonds that it is likely that future returns from both will be below historical averages. I say "likely" because predictions, as HomerJ has kept bringing up, keep being proven wrong by actual market performance. He has wondered if something is wrong with the valuation benchmarks and I am wondering that too. Pretty much wondering is something is going on out there that the accountants are not capturing but that the markets are aware of. Pretty difficult to put a value on intangible but very important assets such things as the going concern value of a business, the value of intellectual property, the value of a brand and customer loyalty.

I keep thinking of the old Warren Buffett quote. When asked if stocks were expensive, he replied, "Yes, but not as expensive as they look." So while we can argue about stock valuations and future expected returns from stocks, we do know that interest rates are at historically low levels. You can't get a 6% yield from Intermediate Term Investment Grade bonds anymore, that alone should depress returns from balanced funds. Sadly, real yields on bonds, that is yields after inflation, has also fallen. Historically, 30 year US Treasuries would yield 3% above inflation, I think we might be lucky to get 0.50% today. That is the real story here.
Stocks have returned "below average" for 20 years.... will we ever return to long term "average"?
Going from memory, I recall that long term returns from stocks range from 8% to 11% a year depending upon when you look. So "average" is more like a range than just a single number. The really bad 50% bear markets are usually once, maybe twice in a lifetime event. We had two such bear markets from 2000-2002 and 2008-2009 within the same decade thus creating a US Stock Market that was flat from 2000-2012. That might be why 20 year returns seem below average. It is the hangover from the market euphoria of the late 1990's.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Mon Sep 16, 2019 11:20 am

rascott wrote:
Mon Sep 16, 2019 11:07 am
nedsaid wrote:
Mon Sep 16, 2019 11:00 am
My take is that given currently high valuations for stocks and bonds that it is likely that future returns from both will be below historical averages. I say "likely" because predictions, as HomerJ has kept bringing up, keep being proven wrong by actual market performance. He has wondered if something is wrong with the valuation benchmarks and I am wondering that too. Pretty much wondering is something is going on out there that the accountants are not capturing but that the markets are aware of. Pretty difficult to put a value on intangible but very important assets such things as the going concern value of a business, the value of intellectual property, the value of a brand and customer loyalty.

I keep thinking of the old Warren Buffett quote. When asked if stocks were expensive, he replied, "Yes, but not as expensive as they look." So while we can argue about stock valuations and future expected returns from stocks, we do know that interest rates are at historically low levels. You can't get a 6% yield from Intermediate Term Investment Grade bonds anymore, that alone should depress returns from balanced funds. Sadly, real yields on bonds, that is yields after inflation, has also fallen. Historically, 30 year US Treasuries would yield 3% above inflation, I think we might be lucky to get 0.50% today. That is the real story here.
Stocks have returned "below average" for 20 years.... will we ever return to long term "average"?

Stocks don't look that expensive to me, in this rate world.
That's not the whole story. Returns over the last 10 years have been very solid (2009-current, 11.89% real). And returns over the last 30 years, 6.98% real, have been very slightly above the long-term historic average for the U.S. Yes, returns over the last 20 years were poor (2000-current, 3.61%), which is wholly due to stocks' terrible performance from 2000-2008 (-5.42% real).

Investors should realize that stocks' returns, even over decades, are volatile. For instance, the 1970s' returns were very poor, but the 1980s and 1990s were great. The 2000s stunk, but the 2010s have been very good. What will happen in the 2020s is anyone's guess, but many are forecasting low but at least positive returns, usually in the 3-4% real range. We'll see.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Muffin Master » Mon Sep 16, 2019 11:42 am

I believe the "lower for longer" returns that most of the major investment firms are subscribing to now do come from some form of mean revision of the CAPE index. The last I saw from Vanguard was somewhere around 4-4.5% on a moderate risk and 5-5.5% on hi-risk for total return. Vanguard uses a private model of the CAPE though. I have see some predictions even lower from other companies. The mantra is "lower for long" across the board though.

For me, it comes down to if I believe strongly in its predictive power in CAPE in a QE, NIRP or ZIRP world.

I don't well at least not the "longer" part.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Mon Sep 16, 2019 11:51 am

Muffin Master wrote:
Mon Sep 16, 2019 11:42 am
I believe the "lower for longer" returns that most of the major investment firms are subscribing to now do come from some form of mean revision of the CAPE index.
There are many problems with that approach though.
SimpleGift wrote:
Tue Apr 17, 2018 5:03 pm
willthrill81 wrote:
Tue Apr 17, 2018 12:12 pm
As noted above, valuations are not reliably mean reverting.
Amen. It's puzzling why folks would think that there's a golden mean value at which stocks are destined to trade. I'm not aware of any economic or financial theory that would support this idea. Clearly, from the historical record, folks are willing to pay a different amount for the same dollar of earnings in different time periods (chart below) — based on the prevailing interest rates, plus investors' preferences, demand and risk expectations.
  • Image
    Note: The full data series is divided into four 35-year periods, with their means in red.
    Source: Shiller Data
Even if one believed stock valuations were mean reverting, which mean above would they be reverting back toward?
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Forester » Mon Sep 16, 2019 12:06 pm

I think he is correct at least regarding 60/40. Bonds have been safe for about four decades, this is long enough for complacency to take hold. Yes bonds will move counter to stocks in the short term but they do look risky on a longer horizon.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by nisiprius » Mon Sep 16, 2019 12:31 pm

Maymaymaymaymay... mahmahmahmahmah... meemeemeemeemee... (Warming up).
CULater wrote:
Mon Sep 16, 2019 8:02 am
This commentary from John Mauldin discusses the increasing likelihood that the portfolio strategy that we've followed in the past may be "broken" and won't meet our expectations going forward.
Could be. So what? Surely you aren't following the salesperson's syllogism,
  • 60/40 stocks/bonds may not meet our expectations going forward.
  • What I am selling is not 60/40 stocks/bonds.
  • Ergo, what I am selling will meet our expectations going forward.
Selling? Salesperson? Sure. Mauldin is the principal of an advisory firm. I don't think he's giving away his strategy for free. Are you thinking of becoming his firm's client, and, if not, why not?

As for expectations, I follow the investing version of the Gestalt Prayer: "I do my thing and the market does its thing. I am not in this world to live up to its expectations, And it is not in this world to live up to mine." I don't assume there must be a way to get 6-8% real returns just because I wish it were so.

But I have never been one of those "many" who "assume stocks will give them 6–8% real annual returns if they simply buy and hold long enough" (influenced, possibly, by their 0% real return 1966-1982). And actually I call strawman on that "6-8%" since even Jeremy Siegel never said anything like that.
the extraordinary stability of the real return on stocks over all major subperiods:7.0 percent per year from 1802 through 1870, 6.6 percent from 1871 through 1925, and 6.8 percent a year since 1926.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by coffeeblack » Mon Sep 16, 2019 12:56 pm

In my opinion a better question is: Why is it that every time some guy who calls himself an investment guru and writes an article someone panics or just feels they need so much reassurance? The so called guru does not know anything because no one really does. Unless any of us have a crystal ball, none of us are gurus. It's all a guess. There are some basic things that are true like more risk more reward.

The other question is if 60/40 or 50/50 or whatever was a bad idea starting today, would you change? Would you go 90/10 or 100%?

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by HomerJ » Mon Sep 16, 2019 12:59 pm

CULater wrote:
Mon Sep 16, 2019 10:10 am
I think the other part of the argument is that both stocks and bonds are "hanging from the same Fed (Central Bank)". What the Central Bank does is having the same effect on both bonds and stocks. They raise rates and both bonds and stocks tank, or they lower rates and both bonds and stocks elevate. Since bond rates are so low and expected stock returns are also so low, the market is hanging on what the Central Bank does. This "common factor" is causing bonds and stocks to move together and seems to be the main factor in causing those movements of any significance. This may be undermining the historical diversification benefit of the 60/40 portfolio. There seems to be some merit in this perspective, IMO.
The same Fed has been in charge of rates since 1913... so how does this undermine the "HISTORICAL diversification benefit"?

Seriously, something has to be different now for this to make sense at all. So what's different?

Sure, we might see low returns for both stocks and bonds going forward... and then probably followed by better returns. That's the history so far. We've seen low returns from both stocks and bonds in the past at the same time, and still the long-term return was decent.

What's different?
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bck63
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by bck63 » Mon Sep 16, 2019 1:00 pm

deleted
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stan1
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by stan1 » Mon Sep 16, 2019 1:00 pm

Are negative interest rates something truly "different" or "noise"?

I don't think we know the answer yet but seems like one should keep an open mind at this point.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by dollar_elbow » Mon Sep 16, 2019 1:01 pm

Of course anything could happen in the future, but I note that for the past decade or so, a 60/40 US AA has returned around the 7-8% return that the Boglehead strategy seems to aim for so I'm not sure that I would immediately conclude it is a failing strategy.

The huge under performance of international stocks during that period might mean that someone committed to a large allocation of international stocks would conclude that a 60/40 portfolio isn't cutting it anymore though.

https://www.portfoliovisualizer.com/bac ... 0&total3=0

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by HomerJ » Mon Sep 16, 2019 1:07 pm

nedsaid wrote:
Mon Sep 16, 2019 11:00 am
My take is that given currently high valuations for stocks and bonds that it is likely that future returns from both will be below historical averages. I say "likely" because predictions, as HomerJ has kept bringing up, keep being proven wrong by actual market performance. He has wondered if something is wrong with the valuation benchmarks and I am wondering that too.
Even if future returns do end up lower than historical averages, it probably won't be forever, because low returns have always been followed by higher returns.

If one believes in valuations and reversion to the mean, then reversion works both ways.

If valuations say expected returns are lower, then if that prediction comes true and returns are lower, at some point, valuations will be lower, and expected returns will be higher.

And over the long-term, you'll get a decent return.

So if someone wants to predict that short-term returns will be lower, I can see the logic. I'm not sure I believe it, because people have predicting that for years and years and years...

But I totally get the logic, and fully expect to see lower returns at some point and/or a crash at some point.

But then I expect it will be followed again by higher returns and a rise.

So anyone stating that "long-term" returns of 60/40 are "dead", frankly, has to offer some much more serious proof other than "short-term" indicators look bad.
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HomerJ
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by HomerJ » Mon Sep 16, 2019 1:11 pm

CULater wrote:
Mon Sep 16, 2019 8:02 am
This commentary from John Mauldin
And stop reading John Mauldin. That guy's track record is horrendous.

How many failed predictions does a person have to make before people stop taking him seriously?
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by midareff » Mon Sep 16, 2019 1:12 pm

Dave55 wrote:
Mon Sep 16, 2019 8:55 am
livesoft wrote:
Mon Sep 16, 2019 8:51 am
The comments in this thread remind of the old adage:

"We turn your money and our experience into our money and your experience."
PRICELESS and RIGHT ON THE $$
LOL.. priceless.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by illumination » Mon Sep 16, 2019 1:14 pm

Stormbringer wrote:
Mon Sep 16, 2019 9:35 am
The very notion of lending 40% of my money for free or worse (at least in real terms) really makes me scratch my head.
I agree

The rules have changed and using the same principles from the past on this makes about as much sense as pretending we still have the same tax code from 30 years ago.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by sergeant » Mon Sep 16, 2019 1:35 pm

Pulse and other vital signs seem strong to me. I'm at 40/60 gliding to 60/40 over the next decade or so.
Lincoln 3 EOW! AA 40/60.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by FIREchief » Mon Sep 16, 2019 1:35 pm

So "GMO" predicts US bond real returns of -1.7% over the next seven years as of 7/31/19. On that day, the TIPS yield curve showed 7 year TIPS at 0.27% real returns. That's almost a 2% deviation from known facts on arguably the safest US bond investment out there. Do these clowns think we're all just plain stupid?? :oops:

ETA: I now see that they've broken out US Inflation Linked Bonds and predicted -1.4% seven year real returns. Again, the TIPS real yield curve released daily by the treasury showed 7 year TIPS at +0.27% on that very date. The article claims this source to be "more realistic forecasts from reliable, conflict-free sources." :annoyed
Last edited by FIREchief on Mon Sep 16, 2019 2:43 pm, edited 1 time in total.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Mon Sep 16, 2019 1:55 pm

FIREchief wrote:
Mon Sep 16, 2019 1:35 pm
So "GMO" predicts US bond real returns of -1.7% over the next seven years as of 7/31/19. On that day, the TIPS yield curve showed 7 year TIPS at 0.27% real returns. That's almost a 2% deviation from known facts on arguably the safest US bond investment out there. Do these clowns think we're all just plain stupid?? :oops:
In a word, yes.

I really don't get all of the doom and gloom we've been hearing for a while now. Bonds will have negative returns over the next X years, stocks will 3% returns, 'the 4% rule is dead, but 3% is safe', 'index investing will go down a black hole', etc. Maybe I'm too optimistic, but I just don't believe that the numbers warrant it.
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by FIREchief » Mon Sep 16, 2019 1:58 pm

Muffin Master wrote:
Mon Sep 16, 2019 11:42 am
I believe the "lower for longer" returns that most of the major investment firms are subscribing to now do come from some form of mean revision of the CAPE index.

For me, it comes down to if I believe strongly in its predictive power in CAPE in a QE, NIRP or ZIRP world.

I don't well at least not the "longer" part.
I agree 100%. If we look at TTM P/E, or future P/E based upon projected earnings, then any P/E based predictions for real equity returns look MUCH better (to us, not the folks trying to sell active management).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by KlangFool » Mon Sep 16, 2019 2:01 pm

willthrill81 wrote:
Mon Sep 16, 2019 1:55 pm
FIREchief wrote:
Mon Sep 16, 2019 1:35 pm
So "GMO" predicts US bond real returns of -1.7% over the next seven years as of 7/31/19. On that day, the TIPS yield curve showed 7 year TIPS at 0.27% real returns. That's almost a 2% deviation from known facts on arguably the safest US bond investment out there. Do these clowns think we're all just plain stupid?? :oops:
In a word, yes.

I really don't get all of the doom and gloom we've been hearing for a while now. Bonds will have negative returns over the next X years, stocks will 3% returns, 'the 4% rule is dead, but 3% is safe', 'index investing will go down a black hole', etc. Maybe I'm too optimistic, but I just don't believe that the numbers warrant it.
willthrill81,

All those statements are irrelevant anyhow. None of us will be getting an average return. We are individuals and we only get one sequence of return out of the whole return sequences.

I am counting on the total capitulation of that 100 % stock and minimal emergency fund folks to improve my return over the next recession. There should be plenty of them after 10+ years of the bull market.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by jmk » Mon Sep 16, 2019 2:06 pm

The fallacy in all these types of analyses is that while it is true that expected returns are historically low on a 60/40 portfolio going forward, what exactly is the alternative? Yes, you can do smart beta and global, and alts to replace some bonds, but in the end lower returns on the two major asset classes means you have to save more to get the same final result. Low expected returns don't mean 60/40 no longer makes sense as a simple 2 fund portfolio. It's not some other things where you can just substitute one thing for another (apples are expensive so eat plums)--
Last edited by jmk on Mon Sep 16, 2019 7:39 pm, edited 1 time in total.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by KlangFool » Mon Sep 16, 2019 2:11 pm

jmk wrote:
Mon Sep 16, 2019 2:06 pm
The fallacy in all these types of analyses is that while it is true that expected returns are historically low on a 60/40 portfolio going forward, what exactly is the alternative? Yes, you can do smart beta and global, and alts to replace some bonds, but in the end lower returns on the two major asset classes means you have to save more to get the same final result. Low expected returns don't mean 60/40 no longer makes sense as a simple 2 fund portfolio.
jmk,

The alternative proposed by all those articles is you are supposed to pay the author a lot of money to manage your money and hope that he/she could beat the market.

They are totally self-serving.

If someone believes that active management is the answer, may I propose

A) BRK.A or BRK.B

or

B) Wellington or Wellesley fund.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by bhsince87 » Mon Sep 16, 2019 2:23 pm

HomerJ wrote:
Mon Sep 16, 2019 1:11 pm
CULater wrote:
Mon Sep 16, 2019 8:02 am
This commentary from John Mauldin
And stop reading John Mauldin. That guy's track record is horrendous.

How many failed predictions does a person have to make before people stop taking him seriously?
I used to be a regular reader, but I gave up on him years ago. I even have a few of his books. I think he means well, but yes, he is a broken record. Supposedly has 1.5 million subscribers, so there must be a market for that stuff.

One good thing about him is that he maintains an archive of his free articles on his website. Anyone can access it and go back and see what he was saying from 2001 till the present. Got to give him credit for that. Many prognosticators bury their previous predictions.

Here's just one random example from 2010: https://www.mauldineconomics.com/frontl ... -mwo012210

"As I wrote in my 2010 forecast, this year is a waiting game. There are so many choices we must make, and the paths we will take from those choices vary wildly. But make no mistake, we are coming close to the end game. Some countries and economies are closer to that point than others, but the entire developed world is lurching, in almost drunken fashion, towards our economic denouement."
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

heyyou
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by heyyou » Mon Sep 16, 2019 2:24 pm

I will be glad when common fear-mongering is more recognized for what it is, a tool for persuasion, which should be ignored by all who are exposed to it.

P.T. Barnum was correct about how often a potential customer was born (every minute). Perhaps he has inspired an editor who suggests attention-getting topics for published articles.

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