For decades, the 60% equities/40% fixed income portfolio construction has been used by advisors and money managers.
However, with inflation here and low bond yields, 60/40 obituaries are penned by some market observers. That may be something of an overreaction, but a strong case can be made that 60/40 investing needs some sprucing up.
Advisors can deliver that to clients with the Siegel WisdomTree Portfolios, which includes two model portfolios – one of which has no bond exposure at all – aimed at bringing a new view to 60/40 investing.
“WisdomTree collaborated with our Senior Investment Strategy Advisor—Dr. Jeremy Siegel, Professor of Finance at Wharton School—to construct portfolios designed to challenge the traditional 60/40 portfolio approach by improving the current income generation and longevity profiles. These portfolios include a Global Equity model and a multi-asset ‘Longevity’ model,” according to WisdomTree.
Today’s combination of rich equity multiples, inflation, and depressed bond yields – 10-year Treasury yields below 1.30% as of Sept. 2 – could indicate that now is a good time for advisors to evaluate these model portfolios. In fact, it is a challenging fixed income outlook that underscores the case for a new way of viewing 60/40.
“Today, high-quality bonds, a mainstay of most portfolios for their consistent yields and downside protection, offer neither yield nor an inflation hedge. Adjusted for inflation, yields on high-quality bonds are negative,” writes Michael Rosen, Chief Investment Officer of Angeles Investments and Angeles Wealth in an op-ed for CNBC. “In other words, investing in Treasurys is guaranteed to earn a full 1% less than inflation over the coming decade. Investors in Treasurys are guaranteed to lose value, as will investors in municipal bonds and even in high-grade corporate credit.”
As advisors know about inflation, there’s considerable debate regarding whether rising consumer prices will be sticky or transitory. It could be prescient to prepare for the worst-case scenario and perhaps consider increasing equity allocations.
“An investment portfolio of all equities is likely to outperform inflation over time, but that would be a very volatile portfolio, subjecting investors to the risk of having to sell stocks to pay expenses at a moment when stocks have declined,” adds Rosen.
The Siegel-WisdomTree Global Equity Model Portfolio is 100% allocated to stocks, including developed international and emerging markets ETFs. The model portfolio can mitigate some of those volatility concerns through its allocations to dividend ETFs and funds that lean into the quality factor because quality stocks are historically less volatile than lower quality names.
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