Is 60/40 investing formula dead? Experts cite need for new strategies

The generations-old 60/40 formula for asset allocation in portfolios – 60% stocks, 40% bonds –  has been on borrowed time for years as money managers frequently reconsidered the efficacy of this method during volatile periods.

Now, with inflation surging and markets tanking, and, more important, the odd dynamic of stocks and bonds moving in concert during inflationary times, the formula might be dead.

Investors depended on the 60/40 equities to bonds mix simply because it worked. The two instruments generally moved in direct opposition, providing an easy hedge and generating stability and returns of about 9% a year.

“There’s a long history that validates the 60/40 portfolio construction with bonds as a diversifier,” said Jeff Rosenberg, portfolio manager at investment manager BlackRock Inc.

Market dynamics erode formula's value

But times of higher volatility, lower returns, and stocks and bonds suddenly moving in tandem, have eroded the formula’s worth. That has set investment managers searching for what they call “alts,” alternative investments – hedge funds, private equity, real estate, private debt, digital currency – long the province of institutional investors but now might be appropriate for individuals.

“We’re seeing a lot of advisors looking for the need for further diversification [beyond 60/40],” said Jon Diorio, managing director of alternatives product group at investment manager at BlackRock “Private equity has been increasingly important in portfolios; institutional investors have been using it for a very long time. Now we’re starting to see individual and retail investors look at the private equity space.”

A recent BlackRock webinar for advisors titled “Beyond 60/40” showcased strategies for new portfolio construction and repositioning in these turbulent times.

“The inflationary outlook is the number one issue,” said Rosenberg. “And as long as that inflationary outlook remains unclear, we're going to have an environment where stock markets and bond markets have the potential to move down together and the reliability of that diversification from bonds in an environment is going to be with us for some time.”

"The inflationary outlook is the number one issue."
— Jeff Rosenberg, BlackRock portfolio manager

Like other investment managers, BlackRock has introduced funds and products for individuals designed to hedge against volatility during inflationary periods.

“The diversifying strategies that we have across the portfolio really allow us to avoid the kind of reliance on market timing and beta anticipation,” said Rosenberg. “Rather, the alternative strategies that we're using, we're borrowing from our hedge fund expertise in long and short strategies.”

Private equity is all about investing in private companies.

Disrupting business models

“Those companies are disrupting traditional business models and they’re operating in parts of the economy that are growing faster than GDP,” said Lynn Baranski, global head of investments for BlackRock Private Equity. “So by investing in them, you're getting exposure to companies that aren't always available in the public markets. Secondly, in private equity, you can really execute on strategies in the private sector that are very difficult in the public space. “

In the last decade, assets under management have quadrupled from about $2 trillion to more than $8 trillion while the number of investors in the private equity markets has doubled as investors searched for diversity, according to Baranski. More important, private equity has outperformed public market indices, by 200-to-300 basis points, she noted.

“I really think that over the next 12 to 18 months, we're going to see some great opportunities for investing,” she said. “I also expect, we will continue to lean into technology companies. If you think about where we are in the market with a rising inflationary environment, companies are going to look to technology to see if there's a way they can take cost out of their cost structure, through the use of technology. So I expect that to continue to be prevalent in our portfolio.”

Carolyn Barnette, senior portfolio strategist with BlackRock, said the new portfolio balance formula going forward might be 60/20/20.

“It’s 60% equities, 20% bonds and 20% diversifying alts,” she said. “This has been hugely successful over time. It’s outperformed the 60/40, it's outperformed the 80/20 with less risk. So this is something where if you get it right, it can really be right.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].