Model Portfolios Allow for More Diversification Than 60/40
A lot of conventional wisdom regarding investing and wealth management has been questioned over the past couple of years. The best example is the traditional 60/40 portfolio. In the last couple of decades, this mix has been sufficient for returns and diversification.
However, this is clearly not the case in the current environment of high inflation and rates, as both delivered poor returns in 2022. In recent months, long-duration bonds have added to their losses, while equity performance has been mixed. The idea that a portfolio of just bonds and equities can deliver proper diversification is no longer valid.
Given that we have ostensibly entered a new era, advisors and investors have to be willing to rethink their assumptions and challenge conventional wisdom. One potential solution is the use of model portfolios.
Model portfolios can be used to add exposure to more asset classes which are truly non-correlated. These include commodities, foreign currencies, real estate, quant strategies, alternative investments, private credit, etc.
Allocations to these areas can lead to a truly diversified portfolio that can sustain performance in all types of environments with the appropriate level of risk. Additionally, advisors can offer more personalized products for their clients that are suitable for a wide variety of goals and needs.
Finsum: For decades, 60/40 has worked in terms of diversification and returns. This may no longer be the case if we are in a period of entrenched inflation and higher rates.
- clients
- advisors
- model portfolios
