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Why 60/40 Asset Mix?

The Bond portion of Institutional investment portfolios nearly ALL approach about 1/3rd … some a bit more, some a bit less … hmmm.

Many Institutional ‘reference’ portfolios have an asset allocation that approximates 60/40.

When any investment geek talks about a ‘typical’ investment portfolio, they use a 60% stocks, 40% bonds asset allocation example. A 60/40 mix is ‘the’ de facto standard asset mix.

Why 60/40?

In a 2008 interview with Advisor Perspectives, the late Peter Bernstein says first ‘Asset Allocation is the primary way to improve performance for the Individual investor’ and that ‘a portfolio of 60% stocks and 40% bonds [is] the center of gravity of asset allocation for long-term investors’.

Harry Markowitz, the pioneer of modern financial theory, when asked how to split ones assets between stocks and bonds said ‘just do it 50/50’!

Vanguard founder and master of simplicity, John Bogle offers a rule of thumb: ‘Hold a bond position (roughly) equal to your Age’.

Where did 60/40 come from?

The theoretical framework for building a diversified portfolio dates back to the work of Markowitz in the 1950’s (and later, Sharpe). Markowitz used the classical market-capitalization-weighted portfolio. 60/40 was the global universe of investable markets.

Investable markets today are off the tracks as massive Government bonds issues have skewed the numbers.

1950’s 1980 2001 2008 2009
Stocks 60% < $5 T $36 T $29 T $44 Trillion
Bonds 40% < $4 T $33 T $27 T $82 Trillion
REITs* Included in stocks <$.9 T $1.2 T $.7 Trillion

*REITs = approximately 5% – 10% of the global investable real estate securities.

Sources: Merrill Lynch, Bank of International Settlements, Amsterdam-based General Property Research’s, General Global Real Estate Securities Index – Global Financial Data, Russell Investments, Barclays indexes.

(Credit Suisse has created a 19-country world equity index denominated in a common currency, in which each country is weighted by its starting-year (1900) equity market capitalization, or in years before capitalizations were available, by its GDP. Same for world bonds).

This is why Asset Allocation modeling tools are built with this global universe of investable markets (the opportunity set) in mind.

Where the 60/40 portfolio sits on the efficient frontier (of an asset allocation tool) is at the cusp where marginal returns are added at a diminishing rate relative to incrementally added risk. Additional returns start to cost more and the price paid is more risk.

Given that many Individual investors get this first step wrong, an Asset Allocation tool can help model what is acceptable downside volatility. (If the Investor says they can tolerate ‘x%’ losses’ or volatility, then the model can show how many times (if any) the selected portfolio mix has dropped below that. From there the risk / return relationship can be dialed up or down. This type of scenario analysis is a worthwhile exercise).

Institutional investors too model the most appropriate asset mix to yield their required return. Given acceptable down-market volatility, the most appropriate weights will progress the portfolio toward longer-term objectives but stay within stated risk guidelines. Acceptable risk drives weights.

So what?

According to Russell Research, a 60/40 stock/bond portfolio has, in nearly all time periods, provided a better outcome than cash, 100% bonds, and has always provided better down-market protection than 100% stocks. This is the case across both inflationary and deflationary times as well as through recessions.

Again, to quote Bernstein, ‘the goal is to survive, and this is more important than a high return’.

Most investors can do just that by sticking close to 60/40.

Next time?


Doug Cronk CFA is Manager, Investments for a Canadian Pension fund.

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