Investing like the pros


The traditional so-called 60-40 asset allocation model, has 60% invested in stocks and 40% in government or other high-quality bonds. But after a decade or more of out-of-the-ordinary market conditions, many investment professionals are tweaking the model or abandoning it altogether.

The historical 60/40 investment management approach performed reasonably well throughout the 80’s and 90’s, but a series of bear markets that started in 2000 coupled with a three decade period of declining interest rates have eroded the popularity of this approach to investing.

Bob Rice, the Chief Investment Strategist for Tangent Capital, spoke at the fifth annual Investment News conference for alternative investments and predicted that a 60/40 portfolio was only projected to grow by a mere 2.2% per year in the future and that those who wished to become adequately diversified will need to explore other alternatives such as private equity, venture capital, hedge funds, timber, collectibles and precious metals.

“You cannot invest in one future anymore; you have to invest in multiple futures,” Rice said. “The things that drove 60/40 portfolios to work are broken. The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore,” he said. “It was convenient, it was easy, and it’s over. We don’t trust stocks and bonds completely to do the job of providing income, growth, inflation protection, and downside protection anymore.”

At TriDelta we put together a brochure that summarizes alternative investments titled, Alternative Investments, A proven path to higher and stable returns (Click to download).

A case in point is the continued success of Yale Universities USD27 billion endowment plan. They recently published an update that confirms excellent performance, a return of 11.3% ending June 2017 as a result of a highly diversified portfolio that significantly limited exposure to bonds of only 7.5% and equities to 19.5% (4% domestic US and 15.5% global, ex US). The rest comprised real estate, absolute return, venture capital, leveraged buyouts and natural resources – these are so called ‘alternative investments.’

Yale University as a prime example of how traditional stocks and bonds were no longer adequate to produce material growth with manageable risk.

Alex Shahidi, JD, CIMA, CFA, CFP, CLU, ChFC, adjunct professor at California Lutheran University and managing director of investments, institutional consultant with Merrill Lynch & Co. in Century City, California published a paper for the IMCA Investment and Wealth Management magazine a few years ago. This paper outlined the shortcomings of the 60/40 mix and how it has not historically performed well in certain economic environments. He states that this mix is almost exactly as risky as a portfolio composed entirely of equities, using historical return data going back to 1926.

At TriDelta Financial we recognize the short-comings of a portfolio limited to the old traditional 60/40 stock, bond model and as a result have embraced alternative solutions as an integral part of our investment management platform.

Anton Tucker
Compiled By:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP and Portfolio Manager
(905) 330-7448