And it’s not even from me! This article from Smart Money is by Brett Arends in which he discusses some of the potential pitfalls of the traditional 60/40 balanced account. Here is part of his critique:
This entire strategy is based on a dubious reading of history, a misrepresentation of the facts and a fair amount of sleight of hand. And it’s terrifying to think that so many people are relying on it nonetheless.
I never cease to be amazed at what passes for logic and historical analysis in the finance industry. With a click of a mouse, analysts extrapolate the future from the recent past. They claim to derive universal rules from a few decades’ data.
Here’s the ugly truth. Contrary to what you are being told, this 60/40 portfolio of stocks and bonds comes with no guarantees. There have been long periods during which it has done very badly.
And why should we be surprised? There is nothing magic about stocks or bonds. They are just investments.
I don’t always agree with Mr. Arends’ take on things, but I do agree with this. The fact that stocks or bonds have done well in certain time periods in the past certainly does not guarantee that they will do well in the future. He’s right that even US stocks and bonds have sometimes done poorly for extended periods—to say nothing of the Japanese experience since 1990.
This, I think, is a good argument in favor of tactical asset allocation as part of a core portfolio. When you have the ability to use many asset classes, you increase the odds that one or two of them may be working. Depending on the investing environment, your returns might come from real estate or commodities. Maybe emerging market bonds will be the ticket at some point in the future. Even if you maintain a balanced portfolio that includes stocks and bonds, it might be wise to allow exposure to a lot of other asset classes as well.
In an uncertain environment, it’s probably best not to tie your hands and to have a wide range of investment options.
