A 60-40 portfolio can no longer deliver growth and inflation protection, investment strategist warns

The new model includes private equity, venture capital, activist investing, gold, timber and collectibles

Oct 27, 2015 @ 10:53 am

By Jeff Benjamin

The standard setup of an investment portfolio has too many risks, not the least of which is an expected annual return of 2.2% for a portfolio of 60% stocks and 40% bonds, according to Bob Rice, chief investment strategist at Tangent Capital.

Speaking Tuesday in Miami at the fifth annual Investment News Alternative Investments Conference, Mr. Rice painted a gloomy outlook for investment strategies that are following traditional paths based on traditional models.

“The things that drove 60-40 portfolios to work are broken,” he said, citing lofty stock market valuations, unprecedented monetary policies, swelling risks in bond funds, falling commodity prices and the influences of technology that is disrupting industries and economies radically.

“You cannot invest in one future anymore; you have to invest in multiple futures,” Mr. Rice said.

For an example of how some of the largest institutional investors are already viewing the investment landscape, Mr. Rice pointed out that Yale University's endowment currently has a 6% allocation to stocks and 5% allocation to bonds.

“That's an all-time low [allocated to traditional investments] for Yale,” he said. “The reason is there are fundamental changes in our economy and the global structure that have fundamentally altered the nature of investing.”

With the foundation laid, Mr. Rice emphasized the use of alternative strategies to accomplish many of the goals that historically has been accomplished through allocations to stocks and bonds.

While growth and inflation protection have long been achieved through basic allocations to stocks, the new model includes alternative investments such as private equity, venture capital, activist investing, gold, timber, and collectibles, in addition to stocks.

For income and downside protection, which have traditionally been achieved through allocations to bonds, Mr. Rice said financial advisers should be also looking at areas such as master limited partnerships, royalties, emerging-markets debt, long-short equity, and long-short credit.

“The old 60-40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore,” he said. “It was convenient, it was easy, and it's over. We don't trust stocks and bonds completely to do the job of providing income, growth, inflation protection, and downside protection anymore.”

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