The simple route to investment success. Follow the 60/40 rule.
If your investment portfolio is in a mess, containing a ragbag of stocks and funds and crypto and anything else that briefly grabbed your attention, this simple rule could bring clarity in place of confusion.
Invest 60% of your money in a spread of global shares, and 40% in bonds.
And that’s it.
It is called the 60/40 portfolio, and investment experts have advocated it for years.
Shares give you long-term growth, while bonds reduce volatility, providing smoother returns and helping you last the course.
If you fancy dabbling in more specialist investments, such as alt-coins, commodities, precious metals and foreign exchange, you can still do that, but the majority of your money should follow the 60/40 rule.
Follow the 60/40 vision
Advisers swore by the 60/40 split for decades, but it fell out of fashion during the bull run of the last decade.
Why put 40% of your wealth into boring old bonds when you could pack your portfolio with runaway US growth stocks such as tech titans Apple, Amazon, Facebook, Tesla, Netflix and Microsoft?
However, investment fashions change and the 60/40 split is back in vogue, as investors note that it continues to deliver the goods, even in these turbulent times.
Last year, the S&P 500 index of top US stocks delivered a total return of around 18%, including dividends.
US investment-grade bonds also did well, returning a respectable 9.2%. Bonds yields fell as interest rates were cut, but prices rose as a result. That's only half the return on shares, but with a lot less volatility and risk.
If you had divided your money 60/40 between the two, and your total return would have been more than 14%.
Naturally, you would have generated a higher return if you had invested purely in shares, but you may also have suffered sleepless nights when global markets crashed by a third during the first Covid crash in March last year.
Keep it simple with ETFs
The soaring popularity of low-cost exchange traded funds (ETFs) has made it easy to do the 60/40 split.
Investors can get a spread of thousands of global stocks through the Vanguard FTSE All-World UCITS ETF or iShares Core MSCI World UCITS.
They can then balance this with bond exposure through, say, the iShares Global Govt Bond UCITS ETF, which invests in government bonds from G7 countries Canada, France, Germany, Italy, Japan, UK and the US. Or maybe the Vanguard USD Treasury Bond UCITS ETF, which invests solely in US Treasuries.
Bring China into the equation
Now there is a fresh twist on the concept. Vincent Deluard, director of global macro strategy at US financial services network StoneX, has recommended a new type of 60/40 split, between US stocks and Chinese bonds.
His recent paper, China is for bonds & the US is for stocks: the new 60/40, argues that US stocks will continue to outperform, as the US Federal Reserve takes a relaxed view of inflation, and the Government pursues growth “to solve its debt crisis and reduce wealth inequalities”.
Deluard's advocacy of Chinese bonds may surprise many, and so will his reasoning. Today, we think of China and Asia generally as being a youthful, populous and fast-growing part of the world, but that may soon change.
South Korea, Taiwan, Thailand and China experienced a baby boom in 1970s, but with prosperity birth rates have collapsed, he says.
As east Asia ages, the workforce will shrink and economy slow. Deluard says this “will be a massive headwind for stocks and a huge boost for its government bonds, which already pay the highest real yield in the world”.
At time of writing, 10-year Chinese government bonds currently yield 2.95%, more than double the 1.30% paid on US Treasuries.
US stocks and Chinese bonds could be the perfect combination. So what do the investment experts think?
Greater diversification is required
James Norton, head of financial planners at Vanguard, supports the traditional 60/40 asset-allocation model. “Fixed income is an important diversifier and helps dampen portfolio risk.” However, he suggests having a global spread of shares and bonds, rather than boiling it down to a straightforward US/China split.
Joe McDonnell, head of portfolio solutions at Neuberger Berman, agrees that investors should have greater exposure to Chinese bonds, as the market is the second largest in the world, totalling $13 trillion, while yields are relatively high.
McDonnell also favours the US stock market, arguing that inflation risk is likely to be transitory, but innovation should remain strong.
He reckons 60/40 split is too simple, though. “Low interest rates, huge central bank balance sheets, high equity valuations and the growing correlation between bond and equity returns all present major challenges to both the ‘60’ and the ‘40’ over the next decade.”
His ideal portfolio would be how much broader reach, and would be split between five asset classes: Chinese bonds; long-term, secular growth trends (primarily US and Asian shares); real assets such as commodities, infrastructure, real estate and value stocks; private equity; and “alternative risk mitigation”, including assets such as foreign exchange and gold.
You could call it the 20/20/20/20/20 portfolio.
Future proof your portfolio
Alex Harvey, senior portfolio manager & investment strategist at Momentum Global Investment Management, says the 60/40 rule has enjoyed "a lengthy honeymoon", but rock bottom bond yields have forced a rethink. "Global bonds have delivered an average annual return of 6% over the last 35 years, but that may not extend for the next 35 years.”
He suggests adding convertible bonds to your portfolio. These bonds can be exchanged for company shares when markets rise, but reduce your exposure to equities when stock markets fall, automatically managing your risk.
As inflation threatens, real assets such as property, commodities and infrastructure can offer protection as well, he adds.
Some investors may also want to pursue more esoteric strategies such as hedge funds and private equity, Harvey says. “Stay truly diversified and don’t bank on the past to be your route to future success.”
Some ETF choices
If that tempts you, you can invest in convertible bonds through a number of ETFs. Popular options include the SPDR Bloomberg Barclays Convertible Securities ETF, iShares Convertible Bond ETF and First Trust SSI Strategic Convertible Securities ETF.
For real estate, consider SPDR Dow Jones Global Real Estate ETF, FlexShares Global Quality Real Estate ETF, Vanguard Global ex-US Real Estate ETF and SPDR Dow Jones International RelEst ETF.
For infrastructure, top ETFs include SPDR S&P Global Infrastructure ETF, iShares US Infrastructure ETF or FlexShares STOXX Global Broad Infrastructure ETF.
There are plenty more ETFs out there, so do your research.
Make your own rules
The original 60/40 split has stood the test of time. It could help new investors find their feet in today's crazy world of cryptos and meme stocks.
The downside is that it rules out a large part of the investment universe, especially if you stick to one country's stock market and one country's bond market, in the shape of the US/China split.
Like all good rules, the 60/40 portfolio looks like it has been made to be broken.
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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