If you’ve scanned financial news over the past couple years or so, then you may have noticed a headline or two indicating the “60/40 portfolio is dead”. If you happened to venture further and read the article to find the reason why, then the answers may vary, especially if you looked at more than one.
For those not familiar, many of these outside commentaries on the 60/40 portfolio debate are discussing the more traditional split between stocks and bonds. The reason it will not work going forward, the current argument goes, is centered on a prediction about inflation and the direction of the economy. The assumption is that the economy is on the decline and inflation will persist, potentially seeing stagflation and presenting price pressures on both stocks and bonds.
Stock prices typically reflect future expectations for the company, with an underlying look-through at the economic backdrop. Increasing inflation is negative for bond prices as yields rise. If we assume both scenarios laid out above occur simultaneously, undesirable results would be likely in the traditional 60/40 stock-bond portfolio … so there is some sense to support claims that the 60/40 is dead.
This leads us to precisely why, at Washington Trust Bank, our portfolios have historically and consistently broadened diversification beyond traditional stocks and bonds. It is times like this in the markets that we do not attempt to make a call on an event ahead of it happening or what we think may happen soon. Such a thing could lead us into trying our hand at market timing.
Take inflation for instance. We have not experienced this level of increase in inflation for over a decade. Extreme inflation has not been seen since the late 1970s. Despite this, we have maintained a portion of our overall asset allocation strategically positioned to protect against unexpected inflation well before it hit. This is found in our consistent exposures to commodities, real estate, global infrastructure, and Treasury Inflation-Protected Securities (TIPS). Each of these asset classes tends to respond favorably in inflationary environments and in their own distinct ways.
Managing risk is at the heart of our asset allocation decisions. We believe actively managing asset allocations coupled with security selection gives our clients the best chance at weathering all market environments over the long term. Every position has a purpose within the portfolio. It may just depend on certain market environments for that to be more evident.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Derrick is an Assistant Vice President and Portfolio Manager of Manager Selection and Due Diligence for Washington Trust Bank’s Wealth Management & Advisory Services and a Certified Investment Management Analyst® professional. He is responsible for all external investment manager analysis, selection, monitoring and retention. He holds a BA from Eastern Washington University and MBA from Gonzaga University.