Why we should rethink the 60/40 portfolio
The 60/40 portfolio split is too generic to accommodate a number of factors, including the fact not everybody has the same risk profile or is the same age away from retirement.
Speaking at a CFA Societies Australia webinar, Sebastian Page, T.Rowe Price’s head of global multi asset, spoke about his recently released book ‘Beyond Diversification – what every investor needs to know about asset allocation’.
“Given low expected returns going forward and given where rates are increasing longevity risk. The answer to the question ‘how much stocks should I own – should it be 60/40?’ is probably more than you think,” he said.
“If you look at our retirement target date strategies, someone who's 15 years from retirement… we think should hold about 85% of their portfolio in stocks.
“At retirement, the equity weight is still about 55%, which may seem high, but at 55 [years old], you're 10 years away from retirement. When you reach 65, you can expect to live for another 20 plus years.”
Page said the reason why the 60/40 advice was generic advice was because risk was not stable through time.
“On a rolling one-year basis, a 60/40 portfolio can deliver as much as 20% volatility, monthly returns, or as little as 5% depending on the market environment,” Page said.
“That’s the same asset mix… so it can look very aggressive when markets are volatile, or it can look very conservative in quiet times.
“Then you need to take into account the fact that capital markets have changed, interest rates are near an all time low, especially real interest rates, so this means if you want to maintain your expected return you need to take more risk.”
He said the financial industry was evolving to dynamically target risk rather than targeting allocation like the 60/40 split.
AUTHOR
Liam Cormican
Recommended for you
Platinum Asset Management has provided an update on the possibility of a merger with asset manager L1 Capital following a period of due diligence.
Commentators may be forecasting consolidation in private market firms but a survey of the industry itself expects new manager formation will still outpace this, especially in Asia Pacific.
Fund manager Pacific Current has appointed a former superannuation chief executive as its newest chair, succeeding Tony Robinson who departs after almost a decade to focus on his role at COG Financial.
The possibility of a private credit ETF is looking unlikely for now with US vehicles seeing limited uptake, according to commentators, but fixed income alternatives exist that can provide investors with a similar return.
