I feel honored to have this opportunity to write for Rowe Wealth Management. I’ve spent over 30 years working in the investment industry and rarely have I found a firm that understands the markets as well as Rowe Wealth does.  

The firm’s approach, that of viewing the market through the lens of Relative Strength, sets it apart from the vast majority of firms who blindly follow more traditional approaches.   

Starting today, I will be presenting you with a series of weekly articles that address, what I believe, is one of the greatest challenges that investors face today.

Investors are faced with this monumental challenge yet few realize what potentially lies ahead.

For decades, investors have relied heavily on a mix of 60% stocks and 40% bonds, or something similar, to produce enough stable growth and steady income to meet long-term financial goals.   

But sky-high stock prices, rock-bottom interest rates, and an increasing tendency for the two asset classes to move in lockstep make it almost a certainty that this strategy going forward is going to fall short of delivering what investors require and expect.

And the timing could not be much worse…

Recent inflationary pressures have sent the cost of goods and services skyrocketing, increasing the costs of living, and therefore creating an even greater need for reliable investment returns. 

Inflation erodes the purchasing power of money. Even modest inflation at 3% annually halves the value of money in 24 years. So outpacing inflation should always be a primary goal for long-term investors.

Unfortunately, the traditional 60/40 portfolio will likely neither grow in excess of inflation nor provide much downside protection.

Today, high-quality bonds, a mainstay of most portfolios for their consistent yields and downside protection, offer neither yield nor an inflation hedge.

To make matters worse, adjusted for inflation, yields on high-quality bonds are currently negative.

In the past, investors could rely on their bond allocation to help offset their stock market losses during periods of market declines. 

About 20 years ago, Treasurys rallied 31% and the Aggregate Index rose 18% as equities fell 49% during the internet bubble collapse. 

At the start of the pandemic last year, stocks dropped 34%, but Treasurys gained just 5% while the Aggregate Index actually lost 3%.

An all-equity portfolio will likely be too volatile, and because of today’s valuations, could be subject to significant losses.

The traditional portfolio of 60% stocks and 40% bonds was meant to solve the twin objectives of long-term capital appreciation and capital preservation… 

But given today’s valuations, that 60/40 portfolio is likely to achieve neither objective, so investors need to change their thinking and their approach.  

This series of articles will address this issue in detail.   

Welcome to “The Death of 60/40.”