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Another Stumble for the 60/40 Portfolio?


Dr. Paul White

October, 3, 2023 - read

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From Bloomberg’s The Close on 9/29/23 with Romain Bostick

From Bloomberg’s The Close on 9/29/23 with Romain Bostick

Bonds diversify stocks, this is typically the first example of diversification to which almost every investment manager points.  We have all seen the charts in prospectuses where bonds help smooth out the performance of all stock portfolios.  This claim usually ends with a period and strongly acknowledging nods....

The chart above shows the performance over a year of stock, bonds, the US dollar, and commodities.  September 2022, March 2023, August 2023, and September 2023 show periods where both stocks and bonds declined simultaneously.  November 2022, January 2023, and March 2023 show periods where stocks and bonds both gained at the same time.  Where is the diversification?  This isn’t meant to be incendiary language, just a sober reflection.  (The question of diversification of commodities alone to a portfolio of stocks and bonds is a larger question.  Those of us who lived through 2008 still have a bruise from that year.)

This is not to say that the diversification of stocks and bonds was always absolute.  In the past one could always find periods where stocks and bonds both gained (or suffered).  The question is will it persist.  Jumping in our time machine back to 2022, we ask the same question.  Fast forward to 2023 and we have our answer.  Being honest we have to remind our readers that it is easy to poke holes in the theory of diversification because it isn’t really a theory, it’s a guiding principle – that's all.  We have stated before that 60/40 is not dead, but we are adamant in saying that it is not invincible.  2023 in toto provides more foundation for that POV.

Diversification, in some sense, necessitates anti-correlation of assets.  Stocks should be up when bonds are down and bonds should be up when stocks are down, in general.  This means it is not only the periods of stock losses that are important but also the periods of stock gains.  The coincidence of stock & bond gains (and losses) in 2023 fly in the face of diversification.  Again, we are not saying that diversification is dead; we are merely pointing out that the diversifying effects of stock/bond portfolios might be softening.  Of note is the addition of commodities to the discussion.  Anecdotally, bare exposure to a commodity index also seems to be “not working”.  This is actually in concert with our view that it takes more than a bucket approach to asset allocation when seeking out the diversification benefits of alternatives (A Portfolio Strategy with Hedge Funds and Liquid Alternatives (joim.com)).

We have straddled the fence in our statements on 60/40.  Rather than saying that 60/40 is dead or that 60/40 must work since it has worked, we are saying that diversification and portfolio construction might take some more thought going forward.  The opportunity here for the investor to take advantage of the breadth of offerings in ETFs.  With the opportunity for success comes the opportunity for missing the mark.  Trinary Capital believes that the judicious application of quantitative investing can help tilt the odds in investors’ favor.

Past performance is not indicative of future results. Remember, there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investment strategies discussed in this article) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Please remember to always speak with your individual advisor before making any investment decisions.

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Past performance is not indicative of future results. Remember, there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investment strategies discussed in this article) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Remember to always speak with your individual advisor before making any investment decisions.