Why we should rethink the 60/40 portfolio
The 60/40 portfolio split is too generic to accommodate a number of factors, including the fact not everybody has the same risk profile or is the same age away from retirement.
Speaking at a CFA Societies Australia webinar, Sebastian Page, T.Rowe Price’s head of global multi asset, spoke about his recently released book ‘Beyond Diversification – what every investor needs to know about asset allocation’.
“Given low expected returns going forward and given where rates are increasing longevity risk. The answer to the question ‘how much stocks should I own – should it be 60/40?’ is probably more than you think,” he said.
“If you look at our retirement target date strategies, someone who's 15 years from retirement… we think should hold about 85% of their portfolio in stocks.
“At retirement, the equity weight is still about 55%, which may seem high, but at 55 [years old], you're 10 years away from retirement. When you reach 65, you can expect to live for another 20 plus years.”
Page said the reason why the 60/40 advice was generic advice was because risk was not stable through time.
“On a rolling one-year basis, a 60/40 portfolio can deliver as much as 20% volatility, monthly returns, or as little as 5% depending on the market environment,” Page said.
“That’s the same asset mix… so it can look very aggressive when markets are volatile, or it can look very conservative in quiet times.
“Then you need to take into account the fact that capital markets have changed, interest rates are near an all time low, especially real interest rates, so this means if you want to maintain your expected return you need to take more risk.”
He said the financial industry was evolving to dynamically target risk rather than targeting allocation like the 60/40 split.
AUTHOR
Liam Cormican
Recommended for you
VanEck’s Bitcoin ETF has amassed $290 million in assets in its first year, but the ETF provider has said financial advisers remain skeptical of the asset.
State Street has rebranded its State Street Global Advisors arm, which has US$4.6 trillion in assets under management, following a series of deals with financial services firms in recent months.
Northern Trust Asset Management has appointed a new head of international and responsible investing.
More than 20 winners have been revealed for the annual Fund Manager of the Year Awards.
