One of the investment strategies that has weathered the test of time is the 60/40 portfolio, also referred to as the “balanced portfolio.” Characterized by an allocation of 60 percent to equities and 40 percent to fixed-income securities, this strategy has become popular among investors seeking a balance between growth and stability. The appeal of this dual-asset allocation lies in its intention to capture upside potential during bullish market phases while acting as a hedge during bearish periods.
During the global financial crisis (GFC) of 2007 to 2008, the traditional balanced portfolio showcased resilience compared to many other investment strategies. To illustrate this, it is worth noting that the Standard & Poor (S&P) stocks experienced a significant decline during this time, plummeting by approximately 57 percent from its high, ending the year with 2008 down 36.6 percent. With the traditional balanced allocation strategy, investors lost only 13.3 percent of their portfolios from market high to market low, ending down 13.9 percent. In other words, while equities showed a substantial setback, the fixed-income component served as a crucial counterbalance, which mitigated overall portfolio losses.
During the early stages of the COVID pandemic, the approach also worked well. In 2020, the S&P 500 fell by almost 34 percent. Yet investors with the 60/40 allocation strategy only lost around seven percent.
However, as market dynamics continue to evolve, sticking with a traditional 60/40 ratio may not be enough to achieve long-term financial goals, especially in light of the effects of inflation.
Fast forward to 2022, when the 60/40 portfolio strategy faced challenges with interest rates rising rapidly. Bonds, a highly regarded stable anchor, recorded its worst annual performance since 2008. This instance caused the portfolio to lose around 15 percent percent of its value, a significant drop compared to its usual stability. The unexpected decline triggered discussions regarding the viability of the 60/40 strategy. Notably, the S&P 500 was down over 18 percent. Following this development, pundits began seeking more robust diversification strategies to navigate today’s markets.
The 60/40 portfolio strategy experienced a resurgence in 2023, with investors witnessing a rebound that countered the setbacks of the previous year and reaffirmed the strength of the time-tested investment approach. Despite this reemergence, however, is the continued efforts of pundits to find a more viable investment strategy.
Fortis Portfolio Solutions, a Chicago-based firm, recognizes the immense need for a risk-control approach in the investment landscape. Therefore, it aims to empower advisors with out-of-the-box insights and investment strategies that aim to mitigate risk while achieving long-term growth. Meridith Hutchens, Fortis’ founder and chief investment officer, remarked, “In our experience, active management and diversification will be key considerations for managing people’s portfolios in retirement, particularly for those relying on investment income for their livelihood.”
Fortis’ strategy involves investing in a broader range of assets, extending beyond United States stocks and bonds and diving into international stocks, real estate, and commodities. Recently, managed futures and bitcoin ETF options are also offered. This approach enabled the company to access opportunities across diverse markets and sectors, boosting the portfolio’s overall returns while reducing volatility.
Investors are now witnessing a surge in the popularity of alternative investments like illiquid credit, non-registered real estate, private equity, venture capital, and opportunistic situations. Fortis offers a word of caution as more delve into these unconventional avenues that promise enticing returns and diversification advantages. Hutchens underscores limited data and liquidity as some of the factors that make these alternatives a risky proposition.
Firstly, illiquidity makes it challenging for investors to exit positions immediately if market conditions turn unfavorable. Similarly, limited data availability increases the risk, as investors may lack essential information to make more informed decisions.
Ultimately, the 60/40 portfolio has demonstrated enduring resilience and value as a long-term investment strategy. However, the shifts within the current landscape and unpredictable market conditions call for the refinement of this approach.
