JPMorgan favors 60/40 over cash for the next decade

The popular 60/40 portfolio isn’t dead, and in fact is a significantly more compelling investment than cash over the coming decade, according to JPMorgan Asset Management.

The strategy of putting 60% of assets in equities and 40% in Treasuries is set to outperform cash by an annualized 4.1 percentage points, and inflation by 4.5 percentage points, over the next 10 years, strategists at the money manager said in a report looking ahead to the state of capital markets in 2024. That’s even with money-market funds paying upwards of 5% these days, they noted.

The endorsement comes as the time-honored portfolio has faced a growing number of critics following its worst performance since the global financial crisis last year. More recently, a Bloomberg gauge of the 60/40 model has slumped roughly 4% since July as turmoil in Treasuries has fueled synchronized sell offs in stocks and bonds, sending investors scrambling for safer assets.

“Why should I extend out of cash?” is the No. 1 question JPMorgan’s money managers get from clients, Monica Issar, global head of multi asset and portfolio solutions at JP Morgan Global Wealth Management, said at a roundtable on Tuesday. But with the cash rate peaking and expected to hover around 2% to 2.5% over the next five to 10 years, other assets will offer more compelling returns, she said.

Still, the long-term promise of the 60/40 portfolio isn’t stopping JPMorgan from recommending a slew of alternative investment options to juice returns, especially with stock-bond correlations no longer reliably negative.

By supplementing the traditional asset mix with a 25% allocation to alternatives — including private equity, real estate and commercial mortgage loans — investors can boost their returns by an additional 0.6% percentage points annually over the next decade, while also reducing risk.

“The objection to alternatives is often their illiquidity, but we believe that liquidity remains an underutilized risk premium in many portfolios,” the strategists wrote in the report.

In dollar terms, $100 in cash will be worth just $133 in 10 years, according to JPMorgan’s analysis. By comparison, the same amount invested in a model 60/40 portfolio will grow to $197 over the span. Add alternatives to the mix and that increases to $208.

“While high cash rates appear compelling, investors should remember that sitting in Treasury bills might mean collecting 5% for limited risk today, but it misses out on compounding of returns over the longer run,” the strategists wrote.

Ultimately, where clients should allocate their investments very much depends on their time horizon, according to David Kelly, JPMorgan Asset Management’s chief global market strategist.

“This is very much a world in transition,” he said. “We don’t expect to go back to low rates soon.”