The below transcript was published on AusBiz – 13th October 2021 – View the full video on AusBiz.

Key Interview Talking Points:

What the 60/40 portfolio was designed for

• Outpacing inflation is the primary goal for long-term investors

• For many years, a large percentage of financial planners and stockbrokers put together portfolios for their clients that were composed of 60% equities and 40% bonds

• The traditional portfolio of 60% stocks, 40% bonds was meant to solve the twin objectives of long-term capital appreciation and capital preservation

• In rising markets, equities delivered capital appreciation

• In falling markets, bonds provided a buffer against losses

• This blend of asset classes did very well through the 1980s and 1990s

60/40 portfolio is overly simplistic

• The investment mix appropriate for a 20-year-old is not the same as that of an 80-year-old

• Warren Buffet has stated that when he dies, he wants his estate invested 90% in equities

• Yale University Endowment Fund has 5% of its portfolio allocated to stocks and 6% in mainstream bonds of any kind, and the other 89% is allocated in other alternative sectors and asset classes. 

Why the 60/40 portfolio is no longer working

Bonds and equities are more correlated

• In recent crises over the past 20 years (“Dotcom” Bust, GFC, Covid volatility), bonds have not buffeted equities in the ways historically expected

• About 20 years ago, US Treasuries rallied 31% and the Aggregate Index rose 18% as equities fell 49% during the internet bubble collapse. At the start of the pandemic in 2020, stocks dropped 34%, but Treasuries gained just 5%

• Both asset classes have started to move in tandem regularly

• During recent market volatility, bonds and equities have shown a strong correlation

We’ve come to the end of a long bull market in bonds. Bond yields are at an all-time low, meaning there is plenty of downside in bond investing

• The 40% which is supposed to reduce risk is now fraught with interest-rate risk

• If interest rates rise, bonds will go down in value. Investors should question whether it makes sense to take that risk for such a small potential return

• Bonds have a poor outlook at this point. They hardly yield anything, and if interest rates go up, you will see capital losses 

• Over 85% of developed market government bonds are yielding below 1%

High valuations of stocks and low yields on bonds mean the next decade will be challenging for investors to protect the real (after-inflation) value of investments. JP Morgan Asset Management has estimated that a 60:40 allocation will return just 3.7% over the next decade.

What alternatives are available?

• Today it is acknowledged that a well-diversified portfolio must include more asset classes than just stocks and bonds. A much broader approach must now be taken in order to achieve sustainable long-term growth.

• Savvy high net worth investors know they have more choice than equities and bonds.

We recently surveyed our investors:

• Almost half have been investing in secured private loans for more than 2 years

• 56% plan to increase their investment allocation over the next 12 months

• None plan to reduce it.

In the old days, a simple 60/40 breakdown made sense because it was much harder to invest in alternative, non-correlated assets. These days, however, there are many ways for investors to gain exposure to a range of asset classes including corporate credit, emerging market debt, private loans, and commercial real estate lending.

To learn more about real estate debt and how to unlock alternative investment opportunities with AltX, visit here.