Looking Beyond the 60/40 Portfolio

The 60/40 portfolio, consisting of 60% stocks and 40% bonds, has long been the standard balanced investment portfolio for many investors.

However, more recently, the combination of several bear markets and lower bond yields have led many investors to question the basic 60/40 portfolio, asking whether additional asset classes like alternatives can achieve the same balance the 60/40 portfolio once achieved.

Is the 60/40 portfolio still the right balanced approach?

Whether investors used this exact allocation for their balanced portfolio or as a starting point, the 60/40 portfolio has long been considered by many to be the model for a balanced portfolio.

However, the past 15 years have challenged this assumption—or at least raised questions about the portfolio’s continued effectiveness.

It’s not because the returns aren’t there, either. Because a hypothetical 60/40 portfolio with 60% in the S&P 500 and 40% in the Bloomberg US Aggregate Bond Index has delivered double-digit returns in 4 out of the past 5 years.¹

The issue nowadays is that same mix of stocks and bonds have become more correlated, shrinking some of the diversification benefits of what was a balanced portfolio.¹

Given these recent shifts, investors may reasonably ask whether the 60/40 allocation is still the right choice towards a balanced portfolio. As always, the appropriate allocation depends on an investor’s unique circumstances, including risk tolerance, time horizon, and overall financial goals.

While the 60/40 mix is often synonymous with diversification, other allocations may also be considered more balanced depending on an investor’s needs. These could include a 70/30 or 50/50 mix, or a customized blend of stocks and bonds designed to align with the investor’s desired risk and return profile.

Alternatives – beyond stocks and bonds

When the 60/40 concept became a standard for a balanced portfolio, alternatives were scarce at best. Today, alternatives are a key aspect of investing for many investors, both professionals and individuals.

There are many types of alternative investments available to investors, including:

• Gold and precious metals
• Real estate
• Commodities
• Farmland
• Art and collectibles
• Crypto currencies
• Venture capital
• Private capital and private equity

These and other alternatives have varying levels of correlation with stocks and bonds. The relatively low correlations of some alternatives can provide an added level of diversification to an investor’s portfolio. Additionally, many types of alternatives may offer potentially consistent and solid returns over time.

Investing in alternatives

In the past, investing in alternatives was prohibitively expensive or simply unavailable on most modern platforms. But that’s changed in recent years, with the rise of alternative ETFs. Additionally, some platforms now make it easy to invest in some alternatives.

Some popular alternatives include:

1. Private equity allows investors to invest in companies that are not publicly traded. In some cases, this can provide exposure to businesses in earlier stages of growth, including the potential to benefit if a company eventually goes public or is acquired. In other cases, private equity firms may generate returns by improving operations and profitability while companies remain private. These investments are typically long-term and less liquid than public equities.
2. Commodities encompass a wide range of assets, including agricultural products, energy resources such as oil and natural gas, and precious metals. Historically, commodities have tended to exhibit low or inconsistent correlation with traditional stocks and bonds, which can make them a potential portfolio diversifier. However, commodity prices can be volatile and influenced by global supply and demand dynamics.
3. Private credit involves non-bank lenders providing loans to companies or other borrowers outside of the public bond markets. These investments often offer higher yields than traditional fixed-income securities, reflecting their increased risk, lower liquidity, and limited transparency compared to publicly traded bonds.
4. Real estate has long been used as an alternative investment by many investors. Real estate investment trusts (REITs), as well as real estate-focused mutual funds and ETFs, provide investors with exposure to commercial and residential properties without the need to directly own or manage real estate. These vehicles can offer income potential and diversification, though they remain sensitive to interest rates and economic conditions.
5. Cryptocurrencies and other digital assets are relatively new forms of alternative investments. They may offer potential growth opportunities and diversification benefits, but they are highly volatile, subject to evolving regulation, and carry unique technological and market risks.
6. Hedged strategies, such as long/short equity, managed futures, and other alternative strategies, seek to reduce market risk or generate returns that are less dependent on overall market direction. Performance can vary widely by strategy and manager, and these approaches may involve higher costs and complexity.

These and other types of alternative assets can provide both portfolio diversification from traditional stock and bond holdings.

Alternative ETFs and mutual funds

A number of ETFs and mutual funds that invest in alternatives² have come into play over the past few years. These funds can help investors who may not want to invest directly in alternatives or who may not be able to commit the funds to be able to do so in a diversified fashion.

These alternative ETFs and mutual funds are often referred to as liquid alts. On the one hand, these liquid alts offer greater access for investors and advisors managing portfolios than investing directly in many alternatives. The ETFs and funds may have relatively low minimums, and they offer liquidity that might not be available via direct investment.

While this is a convenient way to invest, like any ETF or mutual fund, prospective investors must take a good look at the ETF or fund they are considering. Are the expenses reasonable? Does the liquidity offered by the ETF or mutual fund somehow diminish the value of the underlying alternatives in terms of being a diversifier, or diminishing other traits associated with direct investment in the alternative?

The future of the 60/40 portfolio

Investing is an area of continuing innovation and evolution. This includes portfolios such as the 60/40 and other balanced allocations.

There is nothing to say that using the 60/40 version of a portfolio is a good or bad thing for investors. If this is an appropriate allocation for your portfolio, then there is nothing to say that this allocation shouldn’t be used.

However, there are more options for investors looking to take a balanced approach. First of all, even if balanced means simply an allocation of stocks and bonds, the allocation may be different than 60/40 depending upon how aggressive or risk-averse an investor wants their portfolio to be.

The advent of more accessible alternatives can be another tool in achieving the desired balance between growth and managing risk in a portfolio. Alternatives can also be an added portfolio diversifier beyond just stocks and fixed income.