Data confirms: the classic portfolio allocation is DEAD!

One day I was talking to a colleague of mine about diversification. Of course, the classic “60/40 portfolio” model came up. What is interesting is that the internet is full of… rumors and opinions that this type of investment and portfolio allocation is dead.

So, here we go – I thought I should take a look at the matter, to see if the classic portfolio type is still relevant.

I didn't have to look too far - Morningstar.com has already done some pretty good analysis on the topic.

The 60/40 Portfolio: A 150-Year Markets Stress Test 

Actualy, this is a very good, thorough summary. It all comes down to the historical comparison between a 100% stock portfolio and a classic 60/40 portfolio: a traditional investment strategy that allocates 60% of its assets to stocks for growth and 40% to bonds for stability and income.

Historical data, staring from 1870!

Assuming that in 1870 you invested USD 1.

From my point of view - the 60/40 portfolio is absolutely useless since the percentage growth difference is huge.

If you earn USD 33 000 from the stock market and only USD 4000 from the 60/40 portfolio...

Frick that kind of stability if the growth difference is 825%!!!

I don't see the point in such, the most expensive insurance policy in the world.

The 60/40 portfolio performed rather well during the “Lost Decade”, so-called the Dot-Com Bust & Global Financial Crisis.

However, during the last years' roller coaster (war in Ukraine, inflation, supply chain crisis), the 60/40 portfolio performed worse than the stock portfolio.

Let's look at a few more comparisons:

For example S&P500 vs. Nasdaq vs. Gold. Period: starting from 2010.

Here we see that the Nasdaq index shows an even greater contribution. Even gold shows a good result, not to mention Bitcoin and stocks of individual technology companies.

It all depends on the time frame.

Still, if we look at the same instruments only from 2020, since the Covid crash, then gold (marked green) looks very impressive.

I really believe that paying such a large insurance premium is pointless. I'm not saying that a little diversification is bad. I'm saying that it's very rational to keep part of your portfolio in the SP500, technology stocks, etc.

But I'm also saying that you need to look at it all rationally.

That way, the price of a 60/40 portfolio is astronomical!

Even though at first this compromise doesn't seem like anything extraordinary.

Assuming that the average return on a stock portfolio in the long term is 6.5% (after inflation), and the return on a 60/40 portfolio is ~ 4.5% per year. The difference between the two percentage points doesn't seem huge, but in the long term, taking into account the compound interest, the amount becomes huge.

What else makes this compromise absurd?

The bond market no longer gives 5-7% per year, as it used to. Also, the correlation between the stock market and bonds is positive, not negative. This means that stocks and bonds have been falling at the same time recently.

Now you can draw some parallels with one of the most important turning points in financial history – the transition from bank-controlled investment management to “self-managed” investment ETFs (exchange-traded funds).

In the past, people kept their money in banks or in bank-managed funds. They paid a 2-3% management fee per year, and often it was not at all clear what the commission was for. Usually, banks said: “We will monitor your risk, create a balanced portfolio, protect you from fluctuations.” In reality, they simply ate up the Lion's share of the profits.

For example, the difference between an SP500 ETF (0.03% fee) and a Bank Fund (2% fee) with an average return of 8% per year over a 30-year period may look as follows:

The ETF will bring in ~ 10x of the initial capital, as opposed to ~ 5x return vis the Bank Fund.

Looking at these analogies – I would like to say that the 60/40 portfolio IS actually DEAD. Similarly, as the bank investment portfolios...

Of course, we can pull out individual periods, uncovering WHEN and WHICH portfolio has brought the greatest profit. This is the point when it's worth looking at the market from the swing trading perspective. Surfing the market in medium terms, and using the waves of opportunity to make a profit, or patiently waiting in the trenches during periods of crisis.

If you want to understand my view on the markets in more detail, you are welcome to join me at https://investingshortcuts.eu/ courses (some of them ar FREE!) or through my Personal Helpline, one-on-one private tutoring sessions.

Stay tuned!

Agris