By using just the two asset classes listed above, investors can put together one of the most common, all purpose allocation portfolios consisting of 60% stocks and 40% bonds. For decades, it has the recommended allocation for just about any age group. But, like the “4% withdrawal” rule of thumb, even these tried-and-true strategies may not be as relevant as they once were.
For the past few years, investors have experienced very unusual situations that have left them looking for new investment strategies and new asset allocation mixes. Three factors that have reduced the effectiveness of a 60/40 allocation are:
- Low bond yields and low stock dividends.
- During significant downtrends, such as the recession of 2008 and 2009, bonds and stocks both move down together (a strong correlation).
- Volatility in the marketplace with no clear market direction.
It has even been suggested that 60/40 portfolio has 80% of the volatility of a 100% stock portfolio. That comes as a shock to many investors who thought they were more diversified than they really were.
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