Investment News posted Don't Write Off The 60/40 Portfolio Just Yet. Candidly there was very little meat on the bone, but it raised a great issue in terms of exploring whether traditional asset allocations makes sense. This sort of question is being asked a lot as the S&P 500 closed yesterday at a level it first reached December 23, 1999.
In the middle of the last decade, the investing world came to learn much more about so-called endowment investing due primarily to the successful results put up by Harvard and Yale over the course of many years. Beyond equities and fixed income, the endowments invest in private equity, timberland in New Zealand and other exotic holdings that retail investors can't really access. This led to investment products that were marketed such that they were selling the ability to create your own endowment portfolio; things like BDCs and Private Equity ETFs.
There were many articles and blog posts about how to use these products to create your own endowment. My stance all along was that there was much to learn from how endowments look at the (investment) world, but that anything beyond a very modest influence in retail account (I am also including the accounts I manage in this comment) would be a bad idea. Our most tangible influence from my study here was probably including Plum Creek Timber (NYSE:PCL) in the portfolio for several years ago although we did sell quite a while ago.
I continue to believe that some sort of "normal" portfolio allocation continues to be the best way to go for the vast majority of investors. There are two refutations to the idea that stocks have not worked for 13 years. The first is that this is not unprecedented. The 1930s and the 1970s were both periods where stocks, as measured by broad indexes, didn't make any real progress.
The other point, made many times here before, is that there were plenty of markets that did just fine since the beginning of 2000. According to Morningstar, the Vanguard Emerging Markets Stock Index Fund (VEIEX), which has been around longer than EEM, has almost tripled including dividends while the S&P 500 is about 25% (all from dividends).
The other leg to the "normal" allocation is fixed income, and rates are of course close to all-time lows. This creates risk for longer-dated maturities whenever rates start to normalize. Similar to equities, this does not mean bonds won't work, it means that the old standby of something like TLT probably will have a very bad run at some point similar to how SPY has had a bad run for the last 13 years. When rates do turn, it will be important to shorten maturities if you haven't already done so.
To the extent there is room in a diversified portfolio for endowment style holdings (this needs to be decided by each end user), 2008 taught us that these things are probably better off slotted into the equity portion of the portfolio (or maybe fixed income depending on the exposure). The reasoning here is the lament from four years ago (almost five now) about how correlations all went to one. There were actually a few things that held up like gold, managed futures, treasuries and of course inverse funds, even if the inverse funds were not precise. Diversifiers that did not work as well were REITs, commodities besides gold and most currencies.
REITs not "working" in the context of being part of the equity portfolio is far less problematic than being viewed as some sort of island that would somehow go up in the face of a bear market. Ditto commodities. I don't know if anyone still preaches putting 20% in REITs and commodities respectively but long time readers may recall I have been saying that was a bad idea before the crisis and I still believe that now; 20% is way too much.