Investors are turning away from Modern Portfolio Theory’s 60/40 asset allocation model as low bond yields and low stock dividends force them to reexamine this time-honored strategy. Steve told reporter Charles Passy that there is a strategy that exists today to replace 60/40 that is accessible to all investors.
Wall Street Journal, April 23, 2013:
Generations of investors and financial advisers have relied on the so-called 60-40 asset allocation model, which calls for a portfolio with 60% invested in stocks—often via a broad index like the Standard & Poor’s 500—and 40% in government or other high-quality bonds, with regular rebalancing to keep proportions steady. But after a decade or more of out-of-the-ordinary market conditions, many investment professionals are tweaking the model or abandoning it altogether.
The 60-40 strategy is rooted in modern portfolio theory, first popularized in the late 1950s, which holds that diversification among asset classes helps boost returns. The problem, in a nutshell, is that low bond yields—driven by the Federal Reserve’s policy of keeping borrowing affordable—combined with historically low stock dividends have thrown the model out of whack.
To replace the strategy, some financial professionals are turning to alternative investments—like commodities, foreign currencies, real estate or even private equity—that weren’t easily accessible or widely used when 60-40 method became popular. “Today’s tool kit is better,” says Steve Blumenthal, founder of CMG Capital Management in Philadelphia.