Bank of America declares “the end of the 60-40” standard portfolio:
Investors have long been told that the ideal portfolio should carry 60% of its holdings in equities and 40% in bonds, a mix that provides greater exposure to historically superior stock returns, while also granting the diversification benefits and lower risk of fixed-income investments.
Indeed, the $339 billion in inflows to bond funds globally in 2019, and the $208 billion in outflows from global equity funds underscore the power of the ongoing rally in bonds, which has caused bond yields to fall enough that there are now 1,100 global stocks that are providing dividend yields above the average yield of global government bonds.
“The core premise of every 60/40 portfolio is that bonds can hedge against risks to growth and equities can hedge against inflation; their returns are negatively correlated,” Woodard and Harris add. “But this assumption was only true over the past two decades and was mostly false over the prior 65 years. The big risk is that the correlation could flip, and now the longest period of negative correlation in history is coming to an end as policy makers jolt markets with attempts to boost growth.
Instead of U.S. government debt, the authors advise investors to add more exposure to equities, particularly stocks with high dividend yields in underperforming sectors, including financials, industrials and materials, which can be bought at inexpensive valuations.
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