Why the traditional 60/40 portfolio allocation doesn’t work for most investors

By Susan Rupe

The S&P 500 had its worst performance in the first half of the year since 1962 and its second-worst performance in the same period since the index was created in 1957.

What it means is that the traditional 60/40 portfolio allocation between stocks and investment-grade bonds doesn’t work for most investors, Berlinda Liu, director of multi indices with S&P 500 Dow Jones Indices, said in a recent webinar for the National Association for Fixed Annuities.

“It has been a very harsh start so far this year across equities and bonds,” she said. “Maybe the only bright side so far has been commodities.”

With market volatility combining with inflation, a multi-asset approach to investing has become relevant again, Liu said.

“It’s hard for investors to balance inflation and growth. The traditional 60/40 diversification is becoming very difficult when you see bonds and equities falling quite a bit this year. We are seeing people using long-term options to hedge their risk.”

Liu said that advisors who are helping clients wade through their investment options should ask: “What kind of exposure do you want to have? How much risk are you willing to take?”

Many investors are more cautious than they were previously and would like to have less exposure to the upside in return for downside protection, she said.

“Another thing we are seeing is diversification – lots of people are willing to use different asset classes in their portfolio,” Liu said. “Options are becoming popular in portfolio management.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.