The traditional mix of stocks, bonds and cash is not suitable for a world with high inflation rates.BlackRock has warned that a classic 60/40 portfolio will serve investors poorly over the long term, despite a simultaneous rebound for equities and bonds this year.
According to a BlackRock Investment Institute report, the research arm of world’s largest asset manager, the “traditional investment approach” of a 60-40% portfolio of stocks and fixed income made a recovery this year after its worst downturn for decades in 2022.
This strategy has been the cornerstone of many asset managers’ strategies for over 30 years. The strategy is based upon the inverse correlation of bonds and stocks and the assumption, that when one price rises, the other will fall.
It said that it would be unlikely to work if big central banks raised borrowing costs in order to slow down rising prices. Investors should instead shift away from broad allocations of equities or bonds and purchase a wider variety of assets. This includes a significant weighting on private markets.
The report stated that “we don’t expect a return of the joint stock-bond market bull.” “We believe that strategic allocations for the next five years, and beyond, based on these old assumptions don’t reflect the new regime in which we find ourselves — one in which major central banks hike interest rates to recession to try to reduce inflation.
The performance of a typical 60/40 strategy in 2022 was 16 percent lower than it had been. This led to questions about its viability. The annualised returns for the decade ending December 2022 was 6.1%.
BlackRock says that bonds will not provide the same diversification benefits they provided for most of the last few decades when they rose during equity selloffs.
Wei Li is the global chief investment strategist of the BlackRock Investment Institute. He said that “being more agile” was crucial in today’s investing environment.
Li said that the need to react to market shocks and new data would lead to more frequent changes in strategic asset allocation.
BlackRock’s warning on the possible drawbacks to continuing to use a balanced 60/40 portfolio is in stark contrast to Vanguard’s advice. Last month, the world’s second largest asset manager informed clients that the outlook of the performance of the global 60/40 over the next decade had improved significantly.
Vanguard predicts that a 60/40 global portfolio will deliver an annualised return of 6.1% over the next decade. This is up from the forecast of 3.8% made at the end 2021, when the US stock exchange was nearing its all-time high.
BlackRock will shift from a broad allocation to public equities to a more focused stock selection. This means a greater emphasis on selecting companies that can weather a recession better and pass higher prices on to their clients.
It is expecting inflation to be a persistent issue and holds an “overweighted” position both as a tactical short-term and strategic long-term position.