A big limitation of the 60/40 approach is its concentrated exposure to just those two major asset classes. A more diversified, less risky strategy would also include commodities, real estate and cash.
The other big obstacle facing the 60/40 mix is its lack of yield income.
Today, a 60/40 portfolio yields around 2%, which is far from the yields of 5% or more offered during the 1980s and 1990s. If equity returns are lower in the future, this means that dividends are likely to become a larger portion of investors’ total return.
The takeaway is that advisors should think of adding ETFs targeting yield-rich areas such as master limited partnerships (MLPs), real estate and preferred securities—for example, the ALPS Alerian MLP ETF (AMLP), the iShares Global REIT ETF (REET) and the AAM Low Duration Preferred & Income Securities ETF (PFLD).
In any case, attuned investors will have to deal, one way or another, with the 60/40 portfolio’s shortcomings in asset diversification and yield. In the end, the two-trick pony of 60% stocks and 40% bonds performed wonderfully in the past. But as history shows, the past isn’t prologue.