TINA & why the 60/40 portfolio is dead

TINA & why the 60/40 portfolio is dead
The world has changed, your portfolio needs to as well.
Dan Lane
Published
November 3, 2021

Keep six months’ worth of savings in cash in case the boiler blows or you find yourself between jobs. Put x% of your salary into your pension every month. Don’t whistle with a mouth full of custard. Live, laugh, love.

We amass a lot of rules of thumb, adages and guides to life as we get older and, a lot of the time, we can see the sense in them.

But that doesn’t mean we should follow them blindly. Life changes and the tips’n’tricks passed down from our parents might end up as a perfect solution for them, and a horrible one for us.

The classic 60/40 portfolio might be an example of that wisdom ageing poorly.


The 60/40 portfolio: its days are numbered


It’s easy to see why holding 60% of your money in shares and 40% in bonds appeals to investors. The equity portion hopefully provides the growth and the bond part should bring down volatility. 

As bonds and equities have historically moved in different ways to one another, diversifying growth and income streams by introducing an uncorrelated dance partner can be attractive. The theory is that when one falls the other is there to swoop in and style it out.

You might curse that bond exposure when equities are doing well but in a downturn at a time when equity valuations are high, shares are likely to dive more than bonds.


Source: JP Morgan Guide to the Markets, September 2021


We have seen exactly that situation play out over the pandemic - the more fixed income you held, the lower your initial losses. The flipside is that the equity exposure responsible for the heaviest losses turned out to provide the biggest gains eventually.

Your goals and tolerance for risk will have informed where you were on the spectrum and how your portfolio was set up to deal with a crazy 2020.


The name’s bond. Fairly unimpressive bond


So, we’ve made the general case for holding a blend of the two but there are a few reasons why that generic 60/40 guidance makes less sense now.

The first is that bond yields are in their boots. Record low interest rates since the financial crisis in 2008-09 and governments pumping money into the financial system through quantitative easing (QE) have reduced the returns you can get on government bonds.

A good example is the 10-year US Treasury. Its yield fell from 9.5% in 1989 to 2.8% in 2018. 

With the current dividend yield on global stocks sitting at around 3-4% it’s no wonder a lot of investors have chosen to chuck out the bonds and climb the risk ladder into equity income instead. 


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That means we’re now much heavier on shares than a 60/40 portfolio would advise but for good reason - bonds haven’t been playing their part.

Anyone rebalancing their portfolios regularly to maintain that 60/40 split could end up penalising the equity winners and propping up the bond laggards as a result.

That uncorrelated relationship we talked about earlier has changed too. Bonds and equities aren’t the opposites they once were so the diversification element becomes a bit harder to justify.

TINA, there is no alternative


And that relationship isn’t the only thing that looks a bit different now. 

On a personal level, what we’re actually investing for is worlds away from the goals our parents had. 

Growth ambitions weren’t necessarily as aggressive as they are now, which means our allocation to growth assets probably needs to be higher than before.

Record house prices selling for around 14x the average salary in London and stagnant wage growth means we need our money to work even harder than in previous generations.

The demise of gold-plated defined benefit pension schemes and the shifting of that responsibility onto us also means we need that growth early on. We’re living longer and funding a comfortable retirement means staying invested in growth assets for longer too.

All this points to a situation in which there is no alternative for a lot of investors than to increase their equity holdings in pursuit of higher returns while acknowledging the risk that entails.


Where are we now?


Taking all these longer-term factors into account, as well as the US tech-fuelled rally from March last year, it’s likely a high proportion of investors (especially newcomers) will hold no fixed income at all. 

Why go for bonds when they could even be guaranteed to lose you money through negative yields?

As we’ve seen though, it’s not always about that upside. If the shine comes off the big tech players and the post-corona recovery stumbles, having some downside protection can be a big help. 

So if we’re saying that a general 60/40 split won’t cut it, what will?

Here are a few illustrations of how that balance could look in 2021 and beyond. It’s important to highlight that these are just that - illustrations, not a suggestion or recommendation that you buy or sell any of the securities mentioned.

Remember that everyone has their own goals and unique financial circumstances. These, along with your tolerance for investment risk and time horizon, should inform the mix of assets in your portfolio.

Our resource hub for investing in the stock market might be able to help make that blend a bit clearer for you and our guide on how to invest in stocks is a great start for first-time investors. And if you are still unsure of how to pick investments, speak to a qualified financial advisor. 


In your 30s


We all have multiple goals that will need different approaches but a retirement-focused investor in their thirties can afford to hold a much higher exposure to equities than their older counterparts. That’s because growth is essential.

If this cohort wants to achieve the UK’s average income of around £30,000 in retirement, and not deplete their pot, they’ll need £750,000 to start off with. This allows them to take 4% (£30,000) each year, aiming to replenish the stores with investment growth in time for next year.

That might mean following a split à la Warren Buffett. In 2013 he said he was leaving instructions for his estate’s trustees to put 90% of the money he planned to leave as inheritance into stocks and 10% into government bonds.

It’s a strategy that’s best complemented by time and young investors have that in spades. Broad market ETFs tracking indices like the S&P 500 might suit here.

High growth areas that might take time to bear fruit but are ostensibly part of a future economy could feature too. 


ESG, think beyond the green


ESG is a synonym for tree hugging among the laziest of commentators but it’s also shorthand for firms with high sustainability characteristics. And we don’t even need to talk about the environment here. 

Solid corporate governance, treating staff fairly, offering a product that is net positive or at least doesn’t harm us or the world, and treating the community within which it operates with respect all give a firm the chance to survive. 

Young people don’t need a crystal ball to spot industries in decline either through their model going out of date organically, or being taxed, fined and regulated out of existence.

Impax Asset Management might be an option in this regard. As an ESG-focused investment house, both its own growth drivers and the assets it chooses to invest in stand to benefit from a steady move away from destructive companies to those set to play a big part in our lives for years to come.


In your 40s


This is normally when the guidance tells us to start thinking about taking risk off the table, upping the bond exposure and thinking about preserving what we’ve grown.

There’s an element of this that’s still reasonable but keep in mind just what the goal is. If we want to fund a healthy retirement and have no guaranteed income to rely on, we need growth in our 40s too.

There may be a case for both through a trust like Finsbury Growth and Income.

Investors can gain access to long-term winners and dominant firms with good dividend track records at a time when bond yields just aren’t attractive.

An 80% exposure to equities could be complemented by a range of alternatives including income producing REITS. Warehouse REIT carries a decent dividend and isn’t laboured with expensive legacy flagship stores on once popular high streets. 

Warehousing has been the saving grace for ecommerce retailers and unless you think internet shopping is going away, holds the opportunity for growth as well as income.

In your 50s and beyond


Readying that glidepath into retirement becomes a big concern in our 50s. But it’s making less and less sense to chop off the growth at 55, collect the gold watch and get stuck into the decumulation phase.

We still need a bit of growth alongside the necessary income payments and capital preservation. That might mean 50% in stocks and the rest in a broad range of uncorrelated assets. 50% in stocks might seem a lot at this stage but there’s a difference between an AIM miner here and a solid dividend payer. Cut your cloth accordingly.

A good way to access global opportunities and stay well-diversified might be through RIT Capital Partners. Its holdings spread beyond the stock market into commodities, private equity and private hedge funds that us mere mortals can’t access directly.

It has a clear aim of growth and preservation of capital and, as it’s managed by the Rothschilds, you get the benefit of a family who knows a thing or two about both.

The uncomfortable reality for many is that we do still need to hold risk assets during retirement but diversification between income sources and growth drivers should help reduce any negative effects.

Capital growth is still important but dulling your portfolio’s ability to surprise you is too. That’s why multi-asset trusts (or simply pulling together a mix of assets yourself) can be a great help.


Done and dusted?


In the end, these are just guides.

Saying definitively that 30% bonds is correct introduces further conversations about which one, what length, what quality? A Mexican 10-year bond yielding 7% is still a bond but is its risk really that different from a lot of equities?

What these blueprints do provide is investment discipline.

They can stop you from panicking or punching the air too much and rebalancing infrequently prevents you from meddling with the holdings constantly.

Ultimately, these guides are less about the portfolio itself and more about helping us manage ourselves and our emotions through the decades.

Past performance is not a reliable indicator of future returns. Source: FE, as at 2nd November 2021. Basis: bid-bid in local currency terms with income reinvested.


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