Rethinking the 60/40 Portfolio Strategy

Rethinking the 60/40 Portfolio Strategy

Rethinking the 60/40 Portfolio Strategy

January 20, 2023 123 view(s)

In most markets, stocks and bonds do not move together. A popular portfolio allocation strategy based on this fact is called the 60/40. The 60/40 means 60% stocks and 40% bonds. In theory, the portfolio strategy creates security through diversification. However, in 2022, record inflation and rising interest rates caused stocks and bonds to move in lockstep negatively, turning the theory on its head. 

The 60/40 failed the stress test of the 2022 economy. The 60/40 is good in theory but proved flawed in the application when people needed it most to protect them. Countless people feel betrayed by decades of financial industry promises about 60/40 portfolios. 

Markets change and operate in cycles. The point of diversification is to be protected in every market condition, not just most. As many people realized, it only takes one bad year to throw retirement plans off the rails completely. Investment professionals now say it is time to rethink the conventional 60/40 “wisdom.”

The challenge is not throwing the baby out with the bath water. Safety and diversification were the foundational reasons the financial industry created the 60/40. The house’s foundation is solid concrete, but the walls are paper. When the winds blew too hard, the paper walls didn’t remain. Everything inside the house was now at risk. The house needs solid materials built on a solid foundation to offer any actual protection. A solid foundation is a good start, but more than paper is required to keep the family safe from the weather. 

The traditional way investment advisors understand diversification is by holding assets that do not respond to market events similarly. People achieve diversification by allocating resources across asset classes and within asset classes. Most advisors don't put their clients in one stock but in a basket of stocks across different sectors. The same is true for bonds. Advisors recommend the 60/40 because stocks and bonds are considered separate asset classes. Stocks are speculation assets, and bonds are fixed-income. 

The problem investors experienced was two asset classes behaving identically to the market conditions. The error was thinking the differences between stocks and bonds would protect them in the worst market conditions. However, the similarities caused all paper assets to respond negatively when the market reached critical mass. The thing stocks and bonds share is that they are paper assets. They are different branches on the same tree. It was inevitable that they would eventually fall together if the tree were ever chopped down. 

The starting place of rethinking the 60/40 portfolio is being honest about the assets. It is not 60/40. It is 100% in paper assets, and that is not diversification. The similar behavior of speculation and fixed-income investments to challenging market conditions reveals that stocks and bonds are one asset class, not two. As they say, "if it walks like a duck and quacks like a duck."

Stocks and bonds should remain part of a balanced portfolio, but not the entire thing. Instead of thinking the traditional way, it may be better to consider a model where stocks and bonds are a single asset called the paper class. Think about it this way. There are many types of dogs. There are Labradors, Collies, Retrievers, Pitbulls, Boston Terriers, and Poodles. Despite their differences in shape, size, behavior, color, and intelligence, their similar DNA makes them dogs. The shared DNA of stocks and bonds is paper.

Stocks and bonds should be a diversification strategy within the paper class instead of two separate assets. The stock market is divided into sectors like healthcare, technology, consumer staples, and a variety of others. Consider bonds as a different sector of the market. No one except financial advisors making commissions would say to put 100% of your portfolio into the stock market. Instead, it is wiser to diversify across asset classes. 

Financial advisors will ask questions about your risk tolerance, investment horizon, and experience level to determine which asset classes are best. If you are willing to think non-traditionally, there is a much easier question. How much of your money do you want to keep? Most people would answer, "all of it." If "all of it" is the answer, the goal should be to transform all investments into enduring wealth using durable assets.

Ultimately, the end goal of all investments is protecting purchasing power. Since the market works in cycles, it makes sense to make money in the paper class and systemically move gains to durable assets to preserve and build long-term wealth. As assets move into the durable class, they become a war chest against the worst market conditions and the best for legacy wealth.

Investment coins are not always people’s first thought for creating legacy wealth. However, rare and investment coins have many advantages over other durable assets. First, rare coins have an enormous international market and hold value exceptionally well. On the other hand, real estate is a very local market subject to massive fluctuations. Second, coins can store large amounts of wealth in minimal space. Some coins sell for millions of dollars. Moving a few coins across the country is much easier than packaging an antique car or expensive paintings. Third, the coin has a built-in price bottom. In a pinch, one could always melt it for the gold weight in an absolute worst-case scenario. A private business can go bankrupt. A house can burn to the ground, but investment coins can never go to zero. 

There are many advantages to owning investment and rare coins. Rare and investment coins are portable, protect the purchasing power, are internationally coveted, are private, and have intrinsic value. Also, rare coins usually grow during challenging economies and can offer tax advantages. Investment and rare coins should be part of every balanced durable class strategy. 

How much of your wealth do you want to keep?

Call the U.S. Gold Bureau today to learn more about how rare and investment coins can make your portfolio durable.

(800) 775-3504

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