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

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 ... .

 

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'

 

The only Bonds which keep on giving.

 

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?

 

Check out from just before 4:00 minutes in this recent Buffett video for his thoughts on the need for cash.

 

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.

 

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.

 

Thanks @dunno

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

 

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:



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.

 

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

 

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"

 

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.

 

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.



keeping in mind this is all US centric

 

News on the 60/40 Portfolio is all over the shop

 

From Ben Carlson

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

 

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.

 

Classic 60/40 investing strategy sees worst return in 100 years: BofA

Per Charlie Bilello's chart below, long-term bonds in the US are on track for their worst year ever

 

Still mostly dead?

Why the 60/40 model suddenly has life again

T