Before we begin, what is 60/40? When an investment adviser tells you to go 60/40, there’s a good chance they’re telling you your portfolio should be 60% equities and 40% bonds. The bonds offer the safety of a low-risk, low-return allocation while the equities offer more downside but higher upside potential as the trade off. The theory here being the S&P 500 has big drawdowns, the bonds should help soften the blow. This strategy has worked damn near flawlessly the last 40 years or so.
But times are different now. 2020 showed up and took a wrecking ball to all your hopes and dreams for this year. Why should Wall Street still get to operate like everything is normal? Actually, one might argue Wall Street has had an irregular year as well. We had a mini-bubble in bankrupt companies and a bull market riding “trade optimism” for 18 months that morphed into a bull market riding “stimulus hopes” and then a bull market riding “vaccine hopes.” All while millions of Americans are permanently out of work. As I write this, Door Dash has a $60 billion valuation a day after IPO with over $600 million in losses from operations last year. None of this is normal.
It’s a truly incredible time to be alive. There are so many things happening simultaneously. Personally, I don’t think we’re slightly prepared collectively for how drastically different the world is going to be just ten years from now. In this note, I’m not going to touch on how I think the world will look politically speaking. I think there’s a populist rise that has been happening both on the left and the right and I’m not qualified to guess how that all shakes out. From an investment perspective, there are all sorts of concerns to be aware of going forward. Bonds have enjoyed a 40 year bull run that could potentially be coming to an end.
Equities are now trading at price to GDP levels that exceed the dot com bubble and we haven’t sniffed the mean in nearly a decade.
Additionally, the dollar appears to be breaking down technically as well as fundamentally.
Quite the setup, no? If equities are overvalued (they are), bonds are returning negative real yields after inflation (they are), and dollars are losing value, how do we position our investments in 2021?
So is 60/40 dead? The short answer is yes.
In my opinion, you don’t need to look any further than the real yield. When we internalize bonds actually provide a negative return in purchasing power when adjusting for inflation if held to maturity, we quickly realize there is very little justification to hold a standard weighting to bonds.
Either inflation has to come down (spoiler: it won’t) or bond yields have to reverse (spoiler: they won’t). I am very underweight bonds. Let’s say you agree with me. 60/40 is dead and it has more to do with bond yields than equity overvaluation. Where do you put that 40% that would typically be sitting in bonds? Equities? No. Way too risky at these valuations.
Alternative assets are an intriguing answer. “Alternative assets” can mean any number of things. Metal and crypto feel like obvious choices. But now even sports memorabilia is seeing a massive resurgence. When it’s all said and done, I believe sports memorabilia will just be part of it. Consider becoming a member of faybomb.com. Members have access to The New 60/40. It’s my full report sharing specific examples of asset classes, specific assets, and platforms that I like as well as how I’m weighting my allocation to these assets.