Investors have long been told that the ideal portfolio should hold 60% of its equity holdings and 40% of its bonds. This mix offers greater exposure to historically superior shareholder returns while offering the diversification benefits and lower risk of fixed income securities investment.
However, in a study published by Bank of America Securities titled "The End of 60/40," portfolio strategists Derek Harris and Jared Woodward argue that "There are good reasons for the role of bonds in your portfolio rethink". and to target a larger share of equities.
"The relationship between asset classes has changed so dramatically that many investors are now buying stocks not for future growth but for recurring income and buying bonds to earn price rallies," Harris and Woodward
actually point out $ 339bn global bond fund inflows in 201
With the slowdown in global economic growth and the aging population in developed countries, traditionally safer assets such as bonds have gained popularity and contributed to a "bubble" in Creating the world According to the BofA analysis, the bond market threatens to hurt returns for investors who maintain a typical 60-40 split.
"The challenge for investors today is that both the benefits of bonds, diversification and risk mitigation seem to be waning. This happens at a time when positioning in many fixed income sectors is incredibly crowded and bonds are getting stronger. This is prone to sharp, sudden sell-offs when active managers restore balance. "
" The basic requirement of any 60/40 portfolio is that bonds can hedge against growth risks and stocks against inflation. Their returns correlate negatively, "Woodard and Harris add. "However, this assumption has only been true for the last two decades and has been largely wrong for the last 65 years. The big risk is that the correlation is reversing and now the longest negative correlation period in history ends as policymakers challenge markets to try to boost growth.
Meanwhile higher Bond market volatility has resulted in US government bonds delivering a worse risk-adjusted return over the past three years than any other asset class as commodities, while the popularity of bonds which has forced investors to take more risks to achieve the same return.
] "Overfunding positioning means that natural fluctuations in bond prices can exacerbate when active investors are balancing their holdings or when the macroeconomic outlook is changing," Harris and Woodard write.
Instead of US Treasury bonds, the authors advise investors to invest more stocks, especially stocks with high dividend yields in below-average sectors, including financials, industrials and commodities, which can be bought at cheap valuations.
"The future of asset allocation may be fundamentally different from the recent past," it said, "and it is time to start planning for the period after the end of 60/40."
The S & P 500 will be on Tuesday
SPX, + 1.05%
were about 1% below their record high of 3,025.86, which was set on July 26, while the Dow Jones Industrial Average
DJIA, + 0.94%
was around 1.2% below its July 15 record of 27,359.16 and the Nasdaq Composite
COMP, + 1.26%
was around 2.3% outside the record-breaking 8,330.21 that was achieved on July 26th.
The yield on the 10-year US Treasury note
TMUBMUSD10Y, + 2.52%
rose from 1.748% on late Friday to 1.754%. The bond markets were closed on Mondays due to the Columbus Day holidays.