A UK research report has found a growing number of couples over 60 live in separate households, a trend particularly pronounced among those entering a new relationship at this stage of their lives. Improved mental health is a bonus.
Speakers of the calibre of David Knoff, the expedition leader stranded with his team in Antarctic during COVID, can regularly be heard at this global institution that places a premium on knowledge, not qualifications.
Is this the beginning, rather than the end for the 40/60?
2022 has been a torrid year for both bond and equity markets, but particularly those outside Australia. Following Friday’s weak close, the S&P500 is now down close to 19 per cent for the calendar year to date and the US government bond index is down around 13 per cent. As readers in the finance professional would know, these are the two key inputs into the 40/60 or ‘balanced’ portfolio.
The saying goes that it is this combination of assets that offers the ability to generate strong returns for a given level of risk and is pervasive across billions of investment portfolios all over the world. With the vast majority of financial advisers and investment managers in some way or another following this broad asset allocation and diversification strategy, it is somewhat amazing to see the divergence that can result from it’s implementation.
At the most basis level, the 40 / 60 balanced portfolio is looking down the barrel of one of the worst calendar year performances in over 100 years of history. As it stands today, the current loss of around 13 per cent, according to data from NYU and A Wealth of Common-Sense blog, would be the 6th worst in history. It would join illustrious company alongside 2008 and 1930, those being in the middle of the GFC and Great Depression.
What is likely more interesting, is the massive dispersion of returns that is beginning to arise from those implementing this approach. Those pursuing a fully passive, or index-driven, low cost strategy, the returns have been weak to say the least, but for those who had a material exposure or tilt to growth companies, including technology, the returns are as low as negative 20 per cent for the year to date. It was a similar story for those unwilling to embrace ‘alternative’ assets that have become popular in recent years.
But for those willing to shift away from the benchmark and hold either floating rate or shorter duration bond investments, alongside an equity allocation diversified between value and growth exposures, the outperformance is likely to be significant. If you were one of those carrying long duration bonds, an overweight to growth and no alternatives, there is likely a significant amount of pain and client concern, resulting in the question, is it time to change my approach?
On first blush, it seems that it isn’t a problem with the 40 / 60 portfolio per se, but rather the blind implementation of its core principles. There is evidence that outflows from both long duration and growth-oriented equity strategies have grown in recent weeks, as quarterly portfolio changes get implemented, but is now really the time to be changing course?
Both US and Australian government bond yields are now exceeding 3 per cent, despite the fact that employment has only just reached pre-pandemic levels, and both supply chain and war-driven pressures are still straining global supply chains. There is a growing chorus of investors suggesting that the cash rate increases currently priced are too aggressive, which may in fact suggest that bond yields have peaked for time being. If this is the case, is it actually time to be reverting back to the 40 / 60 approach?
Only time will tell.
