Bank of America declares ‘the end of the 60-40’ standard portfolio

[Senator]

As someone who is 95% in equities, this makes sense to me.

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.

But in a research note published by Bank of America Securities, titled “The End of 60/40,” portfolio strategists Derek Harris and Jared Woodard argue that “there are good reasons to reconsider the role of bonds in your portfolio,” and to allocate a greater share toward equities.

“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.”

https://www.marketwatch.com/story/b...0-standard-portfolio-2019-10-15?mod=home-page

 

[upset264]

So after 10 year bull run they recommend a higher allocation to equities. What a bold call. Another sign of a market top.

 

[Al18]

BofA offers terrible Savings interest rates (.03%) and their highest CD yield is also below average at 1.60% for 13 months and lower yield for longer periods. Why should we trust them?

 

[MichaelB]

As someone who is 95% in equities, this makes sense to me.

Just to clarify, most (>50%) of your assets are in rental real estate. The “95% equity” refers to the non-real estate part only.

So after 10 year bull run they recommend a higher allocation to equities. What a bold call. Another sign of a market top.

Indeed. Bold, and timely.

We will continue keeping part of our portfolio in fixed income. Despite the article it does diversify and reduce risk.

 

[Another Reader]

Like the OP, I own rentals. Most are free and clear, and I am working on paying off the rest with excess cash, as the return on that investment is pretty high relative to bonds. The only longer dated bonds I own are in Wellington and Wellesley, which are in retirement accounts. I do own short term treasuries and a treasury money market fund.

People need a place to live, no matter what the paper asset markets are doing. Rents and cash flow may go down, but they are not going to zero. My risk seems to be a lot lower than that of people that rely on paper assets. I don't think I need bonds to "diversify" and reduce my risk.

I pay no attention to what some "expert" at a bank or brokerage house says. If they really knew anything about the future performance of the markets, they would not be working there.

 

[VanWinkle]

"If they really knew anything about the future performance of the markets, they would not be working there."

Bingo!!

 

[pjigar]

Like the OP, I own rentals. Most are free and clear, and I am working on paying off the rest with excess cash, as the return on that investment is pretty high relative to bonds. The only longer dated bonds I own are in Wellington and Wellesley, which are in retirement accounts. I do own short term treasuries and a treasury money market fund.

People need a place to live, no matter what the paper asset markets are doing. Rents and cash flow may go down, but they are not going to zero. My risk seems to be a lot lower than that of people that rely on paper assets. I don't think I need bonds to "diversify" and reduce my risk.

I pay no attention to what some "expert" at a bank or brokerage house says. If they really knew anything about the future performance of the markets, they would not be working there.

Ditto. My rentals are my bonds. Rest is 100% equity.

 

[Senator]

Just to clarify, most (>50%) of your assets are in rental real estate. The “95% equity” refers to the non-real estate part only.

Indeed. Bold, and timely.

True.

Like the OP, I own rentals. Most are free and clear, and I am working on paying off the rest with excess cash, as the return on that investment is pretty high relative to bonds.

Most of mine are free and clear too. I have less than 10% of the value in mortgages (90% paid off).

Despite of this, most financial advisers still say to put my investable non-real estate assets into a standard equity/bonds ratio.

 

[MichaelB]

Most of mine are free and clear too. I have less than 10% of the value in mortgages (90% paid off).

Despite of this, most financial advisers still say to put my investable non-real estate assets into a standard equity/bonds ratio.

That’s poor advice IMHO. People with large real estate rental holdings need a totally different asset allocation.

 

[cooch96]

According to the article, bonds and stocks had a positive correlation from roughly 1970-2000. Is that true?? That makes bonds even less savory.

Also, some are posting that they consider real estate as bonds or at least not true equities. Is that a common understanding? To me, real estate is as pure an equity as there is and I include it in the stocks side of my AA ratio.

 

[Another Reader]

Most financial advisers have no understanding of real estate. They have no idea of how owning a rental portfolio impacts future income and the overall portfolio risk. The 4 percent safe withdrawal rate is usually irrelevant to someone that that has a high percentage of their total investments in income producing real estate.

 

[upset264]

Like the OP, I own rentals. Most are free and clear, and I am working on paying off the rest with excess cash, as the return on that investment is pretty high relative to bonds. The only longer dated bonds I own are in Wellington and Wellesley, which are in retirement accounts. I do own short term treasuries and a treasury money market fund.

People need a place to live, no matter what the paper asset markets are doing. Rents and cash flow may go down, but they are not going to zero. My risk seems to be a lot lower than that of people that rely on paper assets. I don't think I need bonds to "diversify" and reduce my risk.

I pay no attention to what some "expert" at a bank or brokerage house says. If they really knew anything about the future performance of the markets, they would not be working there.

As far as rents not going to zero, I hope you're right, and I don't own any rental property.

My mother told me about a couple of rentals her parents owned in Troy N.Y. when the great depression hit. The tenants could not pay. They let them stay because nobody else could pay either, and they gained nothing by throwing them out.

 

[Senator]

That’s poor advice IMHO. People with large real estate rental holdings need a totally different asset allocation.

100% agree. When I pay off a5% mortgage, that is like investing in a 5% bond. And it is even more guaranteed than a treasury bond, assuming a mortgage is more likely to foreclose, than a T-bill is to default.

 

[Another Reader]

As far as rents not going to zero, I hope you're right, and I don't own any rental property.

My mother told me about a couple of rentals her parents owned in Troy N.Y. when the great depression hit. The tenants could not pay. They let them stay because nobody else could pay either, and they gained nothing by throwing them out.

In that scenario, four percent of what's left of your paper assets are not likely to feed you either. When the depression is over, you will again own valuable assets with unleveraged real estate. The bankruptcies of all the companies backing those paper assets may leave you with nothing.

 

[big-papa]

This topic is also being discussed over on bogleheads
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=292667&newpost=4795488&view=unread#unread

 

[OldShooter]

... If they really knew anything about the future performance of the markets, they would not be working there.

That is one of the first things I tell students in my Adult-Ed investing class.

It's really quite amazing that people actually believe that, if such talent exists, that investors would be able to hire it. I tell students that such talent would be on a private tropical island somewhere drinking out of a glass garnished with an orchid, getting on a computer terminal once in a while when the checkbook got low.

 

[SunBlueSky]

In that scenario, four percent of what's left of your paper assets are not likely to feed you either. When the depression is over, you will again own valuable assets with unleveraged real estate. The bankruptcies of all the companies backing those paper assets may leave you with nothing.

+1

I own one small family home rental free and clear. Right now, it is in a good location (temperate climate, good schools, low crime, no environmental hazards). I'm hoping the location continues to be a good one.

 

[HI Bill]

40% bonds made sense to me, in times when bonds had much higher rates of returns than they do currently. The Monte Carlo and other models include these higher rates of return, and make it appear that they can help you weather the storms; however, it seems unlikely to me (based on current monetary policy), that we'll never see 8%+ rates of return on the better classes of bonds. Therefore, you have to accept the lower rates of return, and the corresponding affect on your portfolio. They do dampen the effects of bear markets/recessions, but that's where the good ends....IMHO.

For those >5 years from RE, I personally think that no bonds is appropriate, and for those in ER, I personally think that a low %, equal to 3 to 5 years of expenses, is appropriate. Diversification, including real estate, is probably wise, as well. YMMV.

 

[Big_Hitter]

As someone who is 95% in equities, this makes sense to me.

only 95%?

 

[NW-Bound]

https://www.marketwatch.com/story/ba...?mod=home-page

While I agree with the article premise that the future return of bonds is not all that great, I don't think that stock return is going to be wonderful either, and also has high volatility to boot.

Therefore, no high stock AA for me. I keep a big slug in cash, i.e. I bond and money market funds. The return is less than that of the current bond yield, but with no volatility. And being an active investor, I use it as the backing to sell out-of-the-money cash-covered puts whenever I feel is the right time to do so, in order to make some extra money.

No rental RE for me. Managing my own 2 homes is enough. I don't want the stress of having to deal with tenants. Selling options is less stressful, and even enjoyable for me.

Of course YMMV, to borrow from Koolau.

 

[Bir48die]

I guess if you were relying on 10 year treasuries or other low paying bonds then maybe I'd try to pay some attention. If one is diversifying in their bond funds then they become a dandy vehicle.