Vanguard still pro-60/40

Jan 13, 2013 @ 12:01 am

By Jason Kephart

Fran Kinniry
+ Zoom
Fran Kinniry

Don't start composing a eulogy for the classic balanced portfolio, The Vanguard Group Inc. warns.

Despite the rise of alternative asset classes, the traditional mix of 60% stocks and 40% bonds is still the best asset allocation for the majority of investors, said Fran Kinniry, a principal in Vanguard's Investment Strategy Group.

Financial advisers increasingly have been turning away from the 60/40 portfolio in favor of less traditional asset allocations, according to a recent survey by Natixis Global Asset Management.

Half the 163 surveyed advisers no longer think that a 60/40 mix is the best asset allocation to achieve performance and to manage risk.

Mr. Kinniry said that he agrees that the performance of the 60/40 portfolio over the next 10 years isn't going to come anywhere close to what it has been historically, thanks mainly to the record valuations and low yields in bonds today.

In fact, he warned that it could return as much as 50% less than its historical average of about 8% or 9% a year.

But when it comes to managing risk, the 60/40 portfolio is still an adviser's best bet, Mr. Kinniry said.

Chasing after a hot new asset class sets advisers up for failure more often than not, he said.

RISK AVOIDANCE RISKY

“The risks of trying to avoid the risks [of the 60/40 portfolio] are greater than the risks themselves,” Mr. Kinniry said.

The reason that he is confident in the classic strategy is that over the past 20 years, nothing has been a better hedge against the downside in equities than investment-grade bonds.

Hedge funds, commodities and real estate investment trusts are all touted for their diversification benefits, but when equities are under the most pressure, those investment classes tend to fall along with stocks, albeit usually not as far.

“Historical correlations are meaningless,” Mr. Kinniry said.

“You need to look at correlations in times of stress,” he said. “That's the only correlation that matters.”

jkephart@investmentnews.com Twitter: @jasonkephart

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