Last year was one of the worst on record for the traditional portfolio of 60% stocks and 40% bonds (the 60/40) and it appears that we are entering a new investment landscape than the one that characterized the past decade. The end of printed money, near-zero interest rates and low inflation that led to strong gains may be replaced by an era of volatility and the outperformance of assets that have been overlooked.

So, this begs the question whether the simple 60/40 portfolio can not only outperform a more diversified strategy, but whether it can perform at all to meet underlying investors’ needs.

One of the best performing assets in the decade following the Global Financial Crisis was the U.S. stock market. From the lows of March 2009 until the emergence of COVID in early 2020, the S&P 500’s compound annualized return was 16%, which was above its long-term average and significantly better than international stock markets. Bond markets were more subdued yet an investor in a typical 60/40 portfolio still averaged 10.6% a year. Whilst it was a great time to invest in a 60/40 portfolio, investors likely “over-earned” during this period.

What “under-earned” was the style of investing typically found within college endowment funds. These funds usually invest in alternative investments such as private credit, real estate, private equity, commodities, and non-correlated strategies like music and healthcare royalties.

David Swensen was seen as a pioneer of endowment-style investing. Until he passed, he ran Yale’s endowment fund for more than 30 years and his approach has been adopted by many of the largest and most sophisticated investors, notably other college endowment funds.

Whilst he was at the helm, Yale’s portfolio annualized returns of 13%, which was roughly a 5% outperformance over 60/40 portfolios at the time, and, through increased diversification, had lower volatility than comparable portfolios.

It was only during that decade following the Global Financial Crisis that Yale’s returns were lower than their long-term averages at 10.9% but still in line with 60/40 portfolios. So what we saw was a similar return in less liquid, higher cost, and sometimes more complex assets, which “under-earned” during the period compared to the long-term averages.

Looking forward, the 60/40 model looks challenged as to being able to sustain the same annualized returns. That model has come off the back of a great period; however, as the Yale endowment fund has demonstrated over the long term, perhaps it is time to consider a more diversified endowment-style approach.

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If you enjoyed reading this article, check out other articles written by Jon:

How Will a Recession Affect Me and What Can I Do to Minimize Its Effects?

What Makes a Good Advisor?

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Source:

Yale Endowment returns, https://investments.yale.edu/reports

Disclosure:

This information is presented for educational purposes only and should not be treated as investment advice. Morton Wealth makes no representation that the strategies described are suitable or appropriate for any person. You should consult with your financial advisor to thoroughly review all information and consider all ramifications before implementing any transactions and/or strategies concerning your finances.