IMBALANCING ACT: The 60:40 Portfolio

No two individuals, investors, economic cycles, or investing days are identical. Additionally, an investor today will evolve into a different investor a year from now since everything changes. The traditional 'buy and hold' or 'set it and forget it' mentality is outdated. Markets are dynamic, and successful investing requires experience and know-how to adapt to the continually changing landscape.

The go-it-alone, do-it-yourself agenda is not for the faint-hearted. Proper investing is a team sport. If you are building a great football team, you want a top-notch quarterback to run the offense. You want Tua! In the field of money management, I prescribe choosing a seasoned veteran who's been in the game for decades and who has already achieved financial proficiency.

The classic 60:40 portfolio has been a cornerstone for many investors. From 2001-2023, the resilience of the mixture of Stocks, Bonds, Real Estate, and readily available Cash is notable. During this tenure, financial markets have weathered the storms of the "Technology Bust of 2000", the "Housing Meltdown" during the "Great Financial Crisis", the tumultuous challenges of a "Global Pandemic", and are now navigating the waters of today's "Rising Rate Regime". In the past, this mixture has bounced back from downturns, marking the strength of diversification.

Equities generally comprise 50% of the traditional 60:40 portfolio (equities:fixed income) and have posted positive results 72% of the time since 1928. However, they've also experienced significant bear markets, defined by stock declines of 20% or more. These periods are consequential for investors. Fixed income has historically acted as the ballast, often buffering the blow during recessions and exogenous events. In this model, investment grade Treasuries and corporate bonds carry a 30% weight.

At first glance, this investment model appears straightforward, and pundits and market analysts praise it. With a substantial 30% allocation in fixed income and an additional 10% in cash, this has lessened the pain from volatility that occurs during market upheavals. That is "IF" the assets have been properly positioned for inflation and duration risk.

REITs and cash, each making up 10%, offer an interesting blend of growth potential and liquidity. While REITs can be a good hedge against inflation, cash provides flexibility for unforeseen opportunities.

In the ever-changing world of finance, it's shrewd to learn from the past and plan for the future. The 60:40 portfolio serves as a proxy for that.

#Economics #FinancialMarkets #PortfolioManagement

IMPORTANT DISCLAIMER: The opinions made herein are for informational purposes and are not recommendations to any person to buy or sell any securities. The information is deemed to be reliable but its accuracy and completeness are not guaranteed. 1st Discount Brokerage does not accept any liability for the use of this letter. Readers of this letter who buy or sell securities based on the information in this column are solely responsible for their actions.