Traditional 60/40 stock and bond retirement portfolio only loses 20% for fourth time

This year, the coronavirus crisis has punished innocent people around the world. As suggested by experts, this includes who do what is called the "right thing" by maintaining a balanced portfolio to fund long-term returns.

As the stock fell to its recent lows this month, the peak of traditional 60% stock and 40% bond portfolios fell more than 20%, the decline since World War II.

At last week's low, the standard retirement allocation was determined by Vanguard Balanced Index FundIt is down 22% from its peak on February 19, which is of course mainly due to the 30% decline in the stock index, while bonds are only partially buffered. In fact, almost selling the worst stocks cannot offset losses with a rebound, because everything except is liquidated.

Upon request, Michael Batnick, Ritholtz's director of wealth management , traces back to tracking every 60/40 portfolio hit at least 20% of the time. Since 1945, this decline has initially occurred only at the following points [using 60% of end-month data S & P 500 And 40% 5-year Treasury bonds]: August 1974, September 2002 and January 2009.

The fact that the 60/40 self-driving method has been reduced by 20% per month only four times in 75 years has proven itself to smooth the smoothing effect of offsetting fixed income interactions.

What happens after the first 20% setback? Those months were within months of the major bear market troughs, although in each case the ultimate lows of the stock index will still come.

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Batnick calculates that in these three in 1974, 2002 and 2009, it took the portfolio 10 to 20 months to return to its peak.

If an investor follows a disciplinary approach and readjusts the shareholding to a 60/40 asset allocation when the first 20% drop occurs at the end of the month, he will receive attractive returns in subsequent years.

In these three cases, the average annual total return of the 60/40 portfolio over the next five years is close to 12%. For this asset allocation, this is a very healthy advantage, well above the long-term average annual return of 9%.

This may be comforting, if not surprising. Any investment discipline that triggers action to take advantage of severely underperformance in an asset class will pay off over time. Rebalancing after a sharp decline in a mixed asset portfolio is usually a nasty stock index breakthrough.

Was the 60/40 position broken?

CJ Lawrence's strategist Terry Gardner pointed out on the basis of a more opportunistic short-term view that buying only the last three times the S & P 500 index is higher than the peak of the month [1987, 2001 and 2008] [25%] year-on-year, always yielding a positive return the following year-although in no case a negative 25% level represents the final low of the stock. One year later, the returns were 20% after 1987, 2.5% after 2001, and 18% after 2008.

Is there any reason to doubt that maintaining a 60/40 stance this time will not be as good as it has been for decades? Some investment experts discussed for a period of time that the basic premise of the 60/40 combination was challenged due to the extremely low bond yields, which greatly reduced the room for bonds to appreciate in an economic slowdown or crisis, thereby reducing their use as stocks. The value of ballast. .

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Goldman Sachs Last week, strategists were wary of the current market downturn. The company said: "In addition to the stock adjustment beyond the normal level, the 60/40 portfolio is also less diversified." "Since bond yields are currently at historical lows and close to the effective lower limit, most [developed ] ] Bonds have little room to buffer stock declines. "

Skeptics can go back to deeper history, and they may notice that the 60/40 portfolio of the 1930s lost 20% over a longer period of time, when the stock market remained underwater during the Great Depression.

Therefore, perhaps over time, bond asset yields will decline during difficult times [unless they turn to negative yields, there will be a series of other problems], and traditional asset portfolios may receive less help for a period of time . However, bonds can still buffer stock losses.

Does rebalancing help the rebound?

The whole problem of rebalancing is not just an academic issue. Wall Street strategists have described in detail the impulse of pension funds and automatic asset allocation tools to transfer hundreds of billions of assets from fixed income to stocks, which is at least an important driving force for the S & P 500's closing close on Thursday.

As of last week, the S & P 500 index was at a low point, and its performance is still about 30 percentage points behind the Barclays Composite Bond Index. Custom Investment Group noted that this effectively converted a 60/40 portfolio to a 55/45 portfolio, one of the largest rebalancing initiatives in years.

Of course, to a certain extent, the timing of this mechanical redistribution is set at the end of the , which means that a short-term favorable factor for the rebound has weakened because the market rebound has reduced the stretch of the index, and investors celebrate New trillions of dollars were backed by the Federal Reserve and Congress.

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On Friday, Canaccord Genuity's strategist Tony Dwyer has been waiting to retest last week's lows for a more aggressive position. Monetary and fiscal stimulus measures will already be announced. "

Although these factors can test the immediate resilience of the market's attempted comeback, there has not been much change in the measures long-term investors should take to adopt this month's rapidly shrinking market readiness.

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