Rachel’s note: It’s Independence Day in the U.S… and much has changed in the past six months. Monumental Supreme Court rulings… record high gas prices and inflation…
And on Thursday, the market officially saw its worst first half in 50 years.
That means what’s worked for investors for decades is no longer working. So today, we’re sharing an essay from Casey Research friend and analyst Nomi Prins.
She’s an investigative journalist, best-selling author, and former global investment banker… And she’s spent much of her career shining a light on Wall Street’s shady practices.
And today she’ll tell you why the traditional 60/40 portfolio is no longer working…
By Nomi Prins, editor, Inside Wall Street With Nomi Prins
Many financial advisers like to push the traditional 60/40 portfolio. They’ve relied on it for decades.
60/40 portfolios split your money into equities and bonds. Usually, it’s 60% in stocks and 40% in bonds.
If you have a financial adviser, chances are you have some of your money split up that way.
But I’ve got bad news for you.
The 60/40 portfolio doesn’t work like it used to when bonds were yielding much higher percentages.
Really, it hasn’t worked like that since The Great Distortion I’ve been writing about took hold and brought with it ultra-low yields.
So if your adviser has you in that sort of split, it may be for their own benefit – not yours.
Let me explain…
Another Side Effect of The Great Distortion
Since the 2008 financial crisis, central bankers have distorted every part of our lives.
The classic 60/40 portfolio is one more example. It’s still by far the most common investing strategy followed by financial advisers.
And there is a good reason for that: liability.
As long as advisers have you in a balanced portfolio, they can claim they’re doing their financial due diligence.
If you go to a financial adviser, they will tell you this old, diversified approach is best. They will preach that you should have both secure (bonds) and risky (stocks) assets in your portfolio.
The logic is simple enough. When stocks do well, they flatter the performance of the portfolio. When stock prices fall, bonds do well.
Bonds also supply guaranteed income. That softens the blow from volatility in the equity market.
A Broken Relationship
And that’s not the only reason the 60/40 portfolio is the most popular asset mix offered to retail investors.
Advisers will also tell you the strategy has a long history of generating strong, consistent returns.
For decades, bonds and stocks moved (more or less) in opposite directions. Traditionally, when one went up, the other went down. By owning bonds alongside stocks, you got a convenient hedge.
That’s what the chart below shows…
But here’s what your financial adviser probably won’t tell you: That relationship has been breaking down in recent times. You can see this in the chart below. It shows the performance of stocks and bonds over the last year…
Over the last year or so, you can see bonds and stocks moving (more or less) in the same direction at the same time.
That means bonds failed to offer a hedge against risk in the stock market, one of their traditional roles.
And the timing of the moves resulted in bonds dragging down the performance of the 60/40 strategy.
Bonds Are No Longer the Safe Choice
That’s one of the greatest examples of distortion I’ve found.
When we look at the superficial data, it says one thing. When we look under the hood, it says something completely different.
Take BlackRock’s 60/40 Target Allocation Fund (BIGPX), for example. It holds a globally diversified portfolio of bonds and stocks. Over the last year it returned -11.9%.
In other words, that 60/40 blend even underperformed inflation, which recently hit 8.6%. That’s not what you want from a portfolio that claims to be the “safe” choice.
At the very least, you’d want any investment you make to beat the rate of inflation. Otherwise, what’s the point?
And right now, the 60/40 model is not suited to that task.
But your adviser will never tell you that.
Advisers look at clients like gym memberships. Most people pay but rarely attend. And most advisers don’t get paid for performance. They get paid for the volume of money they are managing for you.
Advisers think less communication is the key to them holding onto your money. Which is why you have to think beyond the 60/40 split.
What This Means for Your Money
In short, cheap-money policy has distorted every part of our lives. The once-trusted 60/40 portfolio is one more victim of that distortion.
And as I’ve written before in these pages, that distortion isn’t going away.
But you don’t have to be a victim of it, too. You can adapt to overcome the challenges.
That means trying new strategies that provide solutions to a changing world. And that’s something you can’t get from an adviser who only cares about their commissions.
Securing your financial future starts with taking control – and embracing change. That’s what I’m here to help you with.
See, for the past two years, I’ve been developing a new strategy. It’s based on the same type of strategy that big banks paid me millions to develop during my 15 years on Wall Street.
And today, it can help you secure your financial future. Check it out right here.
Editor, Inside Wall Street With Nomi Prins