The 60/40 Portfolio's Overdue OverhaulThe60/40Portfolio'sOverdueOverhaul

Much has been written about how historically low bond yields have sounded the death knell for the 60% equity/40% fixed income portfolio. While we acknowledge that the 60/40 construct is overdue for an overhaul, it is not due to low bond yields.

The 60/40 portfolio’s prevalence is due to its simplicity as well as the theory that the combination of stocks and bonds will provide an optimal balance of asset volatility.
Yet, managing asset volatility is not the ultimate objective for most investors. Rather, their objective frequently involves accumulating enough savings for a future need, such as retirement spending. Portfolios constructed to manage asset volatility result in far different outcomes than those constructed to meet investors’ objectives. Therefore, investors’ portfolios should be constructed to manage the risk of achieving their desired outcome.

Shifting investors’ focus to managing outcome risk also requires a realigned focus on bonds’ risk premia—rather than yield—in the portfolio construction process.

Hence, our 60/40 overhaul progresses through the following points: (1) redefining the concept of successful investing and optimal financial outcomes; (2) the underappreciated role of duration in portfolio construction; (3) why risk premia in public fixed income and its role in portfolio construction matters more than bond yields; (4) as well as how investors’ asset allocations should begin and evolve over time.