Bank of America declares 'the end of the 60-40' standard portfolio

Discussion in 'Share Investing Strategies, Theories & Education' started by Nodrog, 19th Oct, 2019.

Join Australia's most dynamic and respected property investment community
Tags:
  1. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    10,502
    Location:
    .
    Bank of America declares 'the end of the 60-40' standard portfolio
    And here we have Ben Carlson having a go at mocking the article:

    A Eulogy for the 60/40 Portfolio - A Wealth of Common Sense

    Given that the future return on Bonds is it’s starting yield I’m even more committed to my decades old love affair with equities. In fact time to renew my vows:

    I, @Nodrog take thee, Equities, to be my wedded Investments, to have and to hold from this day forward, for better for worse, for richer for poorer, in sickness and in health, to love, cherish, and to ... :).
     
    pippen, DoggaPP, Zenith Chaos and 6 others like this.
  2. Silverson

    Silverson Well-Known Member

    Joined:
    11th Jun, 2016
    Posts:
    865
    Location:
    Melbourne
    I have ZERO direct exposure to bonds, nor do I intend to. Cash in an offset is enough for me, namely an offset on a residential property with low IR's no margin call and ripe for the picking in times of 'market moods'
     
  3. SatayKing

    SatayKing Well-Known Member

    Joined:
    20th Sep, 2017
    Posts:
    9,226
    Location:
    It's All About Me.
    The only Bonds which keep on giving.

    [​IMG]
     
    datto, Zenith Chaos, number 5 and 2 others like this.
  4. geoffw

    geoffw Moderator Staff Member

    Joined:
    15th Jun, 2015
    Posts:
    10,808
    Location:
    Canberra
    I would so much love to have cash in an SMSF available as an offset to my personal mortgage. In the absence of that, there's some allocation to VGB.
     
    Cycle likes this.
  5. Burgs

    Burgs Well-Known Member

    Joined:
    19th Jan, 2019
    Posts:
    256
    Location:
    ACT
    Very interesting Nodrog .
    This got me thanking about the 90% S&P500 and 10% bonds portfolio that Buffett suggested years ago, I always wondered how he came to choose 10% bonds. As it turns out the ratio is pretty good.
    Found this very interesting article that will be music to your ears Is Warren Buffett's 90/10 Asset Allocation Sound?
     
    Ynot likes this.
  6. dunno

    dunno Well-Known Member

    Joined:
    31st Aug, 2017
    Posts:
    1,263
    Location:
    .
    Check out from just before 4:00 minutes in this recent Buffett video for his thoughts on the need for cash.

     
    Zenith Chaos, Nodrog, Anne11 and 2 others like this.
  7. Burgs

    Burgs Well-Known Member

    Joined:
    19th Jan, 2019
    Posts:
    256
    Location:
    ACT
    Thanks dunno
    All starting to make a lot of sense depending on your circumstances.
    I'm starting to get a lot of confidence by keeping it simple.
     
  8. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    10,502
    Location:
    .
    Thanks @dunno, love it.

    In hindsight given our circumstances the amount of cash being held was a mistake. Should have been listening to Buffet as opposed to Bernstein. That said if what Buffet said was in print and the author unknown I would have sworn that was from Thornhill:). That is, if receiving $x in dividends pa then no cash needed. Funny in that these old timers whether it be recently departed Bogle or Buffer still view stocks as a source of dividends.

    Just returned from a session of serious craft beer consumption (no consuming the same beer more than once) with the neighbours so “not advice” applies more strongly than usual.
     
    Zenith Chaos, sharon, Redwing and 6 others like this.
  9. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    6,220
    Location:
    WA
    Thanks @dunno

    Just watched (that part of) the Buffett piece and then Bogle below on various asset allocation and a bit of historical insight

     
    Zenith Chaos, Burgs and dunno like this.
  10. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    6,220
    Location:
    WA
    From Ben Carlson

    Is this one of the most challenging investing environments ever? You could have made the following case for the past 5-6 years but it remains true:

    Interest rates are extremely low by historical standards and stock market valuations are high by historical standards. Add that up and the natural conclusion is forward long-term returns should be lower.
    Here’s a simple chart that shows the combined 10-year treasury yield and the earnings yield on the stock market (using the CAPE ratio1) for a 60/40 portfolio:

    upload_2019-10-22_4-56-22.png

    As of the end of August, the 10-year treasury yielded roughly 1.7% while the earnings yield on the stock market was 3.5%%, good enough for a 60/40 combined yield of just 2.4%. That’s tied for the lowest yield on record going all the way back to 1915 (it hit this mark for the first time in 2016).

    I may be exaggerating a bit here on this being the most challenging market ever but U.S. markets aren’t exactly throwing out fat pitches at the moment.
     
  11. SatayKing

    SatayKing Well-Known Member

    Joined:
    20th Sep, 2017
    Posts:
    9,226
    Location:
    It's All About Me.
    I have to shamefully admit I didn't know until this thread was created there was a 60-40 standard portfolio.

    Going to a corner to sulk now. I've got that "LLIMO"** feeling.
















    **Looks Like I Missed Out
     
    Redwing, Zenith Chaos and sharon like this.
  12. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    3,248
    Location:
    AU
    60-40 has historically been efficient frontier sweet spot....

    Quoting John Hempton @ Bronte Cap.

    "The 60-40 portfolio is the benchmark of the risk averse passive investor – especially the risk
    averse passive American investor.

    The idea is simple. Put 60 percent in a broad equity index (usually an S&P 500 ETF) and 40
    percent in a broad bond index (in the past the choice was the Lehman bond index but these
    days people substitute a Treasury index).

    Then every month you rebalance so that the weighting remains 60-40.
    If the equity market goes up relative to bonds you are forced to sell equities and buy bonds
    to keep the 60-40 ratio. If the equity market goes down relative to bonds you are forced to
    sell some bonds and buy some equity. The net effect is you tend to buy equities when the
    market falls and sell equities when the market rises. Over fairly long periods of time this
    simple passive portfolio outperformed both the equity and the bond market.

    The portfolio worked well for another reason too – which was that the bonds were inversely
    correlated to equities. The bonds appreciated just as the equity market was giving you a
    tough time. This meant (by selling some bonds) you could buy even more equities when the
    equity market was low.

    The current “everything bubble” however has challenged the 60-40 portfolio. Bond yields
    have fallen to the point where real yields are approximately zero (or even negative).
    Moreover, equities have become more correlated to bonds which removes many of the
    rebalancing advantages of the 60-40 portfolio. Notwithstanding this we still believe the 60-
    40 portfolio has much to recommend it.

    Indeed, we think (as do several of our clients) that the 60-40 portfolio is the benchmark for
    a multi-generational endowment. It may not be flashy – but it is low risk – and it should be
    stable enough for the next century.

    It will also – just by its nature – underperform every bull market, outperform bear markets
    but still be positively market correlated. The 60-40 portfolio still loses money when the
    market goes down – just not as much as more aggressive portfolios"
     
  13. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    10,502
    Location:
    .
    You haven’t missed out on anything. 60 / 40 is rubbish, 100 / 0 which is your equity / bond asset allocation is the gold standard in investing. I would have included @dunno as also following the highest of standards but unfortunately he fails due to holding 1% allocation in cash:D.
     
  14. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    6,220
    Location:
    WA
    Ferri: Wisdom Of 60/40 Portfolios Timeless

    Peter Bernstein wrote The 60/40 Solution in 2002. His seminal article laid out arguments for why 60% stocks and 40% bonds is the “ideal asset allocation” for long-term investors. He considered this allocation the “center of gravity” on a risk and return spectrum.

    upload_2019-10-22_18-35-32.png

    keeping in mind this is all US centric
     
    Zenith Chaos, Anne11 and The Falcon like this.
  15. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    6,220
    Location:
    WA
    News on the 60/40 Portfolio is all over the shop
    upload_2020-11-27_15-8-41.png
    upload_2020-11-27_15-9-16.png
     
    Anne11 likes this.
  16. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    6,220
    Location:
    WA
    [​IMG]

    From Ben Carlson

    The Vanguard 60/40 portfolio is now up 13.3% in 2020

    6-40.jpg
     
    Anne11 likes this.
  17. Hamish Blair

    Hamish Blair Well-Known Member

    Joined:
    29th Sep, 2015
    Posts:
    483
    Location:
    Melbourne
    Remember prices and yields are inversely correlated.

    The difference between a bond an [X] is that the non eventually matures.

    The Capital Asset Pricing Model (CAPM) says that the return required on a risky investment, like equities, is the risk free rate (long term government bond) plus a risk premium, adjusted for the undiversifiable risk of the investment.

    (Meaning governments should not base the NPV of risky investments on their borrowing rate; the risk must reflect the risk of the project e.g. a tollroad built by government should reflect construction risk and traffic volume risk.)

    As interest rates drop, prices increase hence high P/E and EBITDA multiples for listed stocks.

    Money has to find a home somewhere and as competition for yield increases, prices are driven up.
     
    Empire likes this.