Did The Tide Just Go Out On 60/40?
The stock market is down a lot and there is dysfunction in various segments of the bond market and so there are plenty of articles going around that question the wisdom of a 60/40 equities/fixed income portfolio. The stock market has gone down a lot before, there have been past episodes of bond market dysfunction and articles in the past questioning the wisdom of 60/40. A professional acquaintance recently emailed and reminded me of Zvi Bodie's preference for asset allocation, wondering if that might be superior, which we'll get to below.
Mike Santoli dove into 60/40 portfolios in a column for CNBC noting that the current event marks only the fourth time in history that 60/40 has declined by 20%. Santoli "notes that in those three instances in 1974, 2002 and 2009, it took between 10 and 20 months for this portfolio to recover back to its peak level." So we know it will recover, we knew that ahead of time, and on this go around it will either take longer or shorter than that, don't know but we don't need to know. A message I've been sending a lot lately is that if you have cash set aside to cover expenses for a while, have an asset allocation that you can tolerate and can avoid succumbing when emotions to creep in then you are very well positioned to take advantage of your greatest haven asset which is time. If you didn't take any sort of defensive action or wish you'd taken more, time will still bail you out if you let it.
If you think 60/40 (or something similar) is no longer the way to go, then fine, change it but not now, not in the middle of an event for which we can't see the end yet. In SPX terms, wait until we get back to at least 3000 and ideally by then, bond market dysfunction will have receded. Making serious changes now would be driven from some combination of fear and impatience which are lousy inputs for investment decisions.
For years, I've included exposure to alternative strategies in client portfolios. My interest was spurred back in the 90's when I read about Jack Meyer at Harvard Management Company using timberland as an alternative. I bought SPDR Gold Trust (GLD) on something like its second day of trading in 2004, had a lucky sale with a chunk of it in 2011 and still have the remaining shares. Along the way I've used managed futures, a couple of different variations of long/short and a couple of others that I thought could be bond market proxies because my concern with bonds was that interest rates were too low. They went much lower than I could have ever imagined but buying high is still buying high. Obviously I have fixed income exposure but I've had good luck with the alternatives I've used. Some alts do not deliver on the expectations they set or otherwise disappoint so tread carefully and make sure you understand what a strategy's expectation actually is. Some portion of funds not doing what investors expect falls on investors not actually understanding the objectives.
I think I might have found a new alternative fund. Back in January I bought shares of Standpoint Multi-Asset Fund Institutional Class (BLNDX) in my wife's IRA. This is a very new fund. I've come to know the guys running the fund and their strategy makes intuitive sense to me. It's a 50/50 equities/managed futures. They have plenty of data and I find it compelling. Right out of the blocks it got confronted by the Coronavirus event and as of Friday is only down 5.7% from it's high. To be clear, I have no financial relationship, the strategy resonates, I bought shares and can see using it for clients but have not done so as of now.
Bodie's idea of asset allocation is intellectually appealing but difficult to pull off. Similar to Nassim Taleb, he has written about 90% into inflation protected assets, TIPS are the easiest access there, and the remaining 10% into very risky assets. Anyone can get the 90% right but that 10% is difficult. Are you buying Tilray (TLRY) at $30, on the way to $300 or are you buying it at $300, on its way to $30. It closed on Friday at $9.10. Even if you spread that risk bucket out across ten names, are you likely to do a good enough job picking that you get the returns needed for the overall portfolio to have the growth you think you need? If the stock market has an average annual return of 10% (it doesn't but it makes the math easier) and you have 60% in equities then the equity allocation would provide 6% to the overall portfolio (yes, there are some optimistic assumptions there). In Bodie's portfolio, his preferred allocation to equities would need to go up 60% to equal the 6% contribution made by a 60% allocation growing at 10%. I don't want to bet that I can do that. Bodie's portfolio seems more palatable for people who are not relying on normal equity market growth for their financial plans to work. People in that category could be very wealthy, have a large pension, be able to know that they will never retire or maybe have other streams of income.
I'm not interested in defending the shield on 60/40, it is no more or less valid than it has ever been. The reality is that we had a very fast crash and part of the dynamic causing bond market problems ties in to the cliche that if you can't sell what you want, sell what you can. Against that chaotic backdrop where investors, more often than not professional investors, feel they must do something, you do not have to do anything. I've made a couple of tweaks in client accounts along way in line with the strategy I laid out long before this event started but am not in there trading every day. The ability to do nothing is vastly underrated and I think pertains to many aspects of life, not just investing.