Investors risk losing a significant amount of capital if they stick to the time-honored 60/40 investment strategy, with these portfolios performing worse than before, warned the CEO of a leading independent financial advisory and fintech.
The ‘balanced’ strategy of allocating 60% to equities and 40% to fixed income has dropped about 14% so far this quarter, according to Bloomberg data published on Monday.
Nigel Green, founder and chief executive of the deVere Group warned that portfolios with the classic 60/40 mix are now performing worse than they did in the storm of the financial crash and in the trough of the unprecedented upheaval at the height of the pandemic.
“Previously the time-honored strategy had been successful. When stocks collapsed, bonds remained relatively buoyant to compensate,” said Green.
“However, this is no longer the case as red-hot inflation triggers a cross-asset sell-off, hitting both stocks and bonds at the same time. The 60/40 investment portfolio model is no longer fit for purpose.”
To achieve long-term portfolio growth, said the deVere Group CEO, investors should keep some of their wealth in cash for everyday spending requirements, and a rainy day or emergency fund.
They should also consider increasing their exposure to significantly more diverse, and perhaps more volatile, investment opportunities.
Less traditional, return enhanced
“If you’re seeking both capital appreciation and capital preservation, in this environment you should consider diversifying into less traditional, return-enhancing asset classes.
“These could include venture capital, structured products, high dividend stock, hedge funds and managed futures, and real estate, amongst others.”
These types of investments could also be helpful in improving the risk-return characteristics of an investment portfolio.
“This is because they increase diversification and reduce volatility, due to their low correlations to the more traditional investments; and they can hedge some portfolio exposures,” explained Green.
As ever, market volatility is the time when most opportunities are presented for investors looking to build long-term wealth.
Last week, the deVere boss explained the panic-selling of recent days created some important long-term opportunities with high upside potential and low-risk possibilities for those who buy judiciously.
“There’s no doubt that some fortunes will be made in this bear market, like in others before.”
He concluded that inflationary pressure – caused by a myriad of different and complex issues – means we’re in highly unusual times for financial markets.
“This means you need to look at alternative ways to build and protect your long-term wealth.
“There are many established opportunities and solutions outside of the classic 60/40 strategy that can help outpace inflation and offer considerable downside protection,” Green said.
