The traditional mix of 60% equities and 40% bonds in an investor portfolio has guided investors for decades, but it no longer works for many people, and it may be time to add in some alternatives for balance and income, according to Kelly Ryan, head of independent wealth management at State Street Global Advisors, an asset management firm based in Boston.
A different approach is needed now for those looking for income in the low-interest-rate bond market and volatile equities market, Ryan said in an interview with Financial Advisor.
“The markets are evolving, but we will have a low-interest-rate environment for the foreseeable future,” she said. “It is important for investors to work with a professional to help guide their investments. An advisor can help with budgeting for risk and liquidity. The need for income increases as we age, and the goal is to achieve the right mix of investments for all ages.”
In 2020, bonds yielded almost no income, and the stock market saw both record drops and outsized highs. In such an environment, “there is no one-size-fits-all investment mix,” Ryan added.
And the Covid-19 pandemic has increased the difficulty of finding that right mix, according to a State Street Global Advisors’ report, “Portfolio Construction In and Out of the Core For the Next Decade.”
“Given our new reality, the standard 60/40 portfolio needs to be tailored—both in the core and outside of it—if return targets are to be met over the next decade,” the report said.
“Just as the pandemic has amplified certain societal trends, it has the potential to advance the deterioration of the 60/40 portfolio’s risk/return profile,” the report said. “As a result, structuring portfolios now requires a more tailored approach in order to meet specific return objectives and ensure that the portfolio remains properly diversified.”
The report advises: “Think about paring back some of both the stock and bond allocations in the 60/40 portfolio and replacing them with an alternative strategy as a potential source of diversification—with the weight depending on investment-specific constraints and [the] criteria” of the individual investor.
“Investors’ needs are not static,” Ryan added, “therefore, investments must evolve with those needs.”
To diversify, investors may want to look beyond stocks and bonds to things such as high-yield bonds, mortgage-backed securities and emerging market debt to add income to their portfolios, she added.
The report said it’s important to diversify to blunt the risks lying ahead, and one way to do that is to seek out non-correlated strategies to “bolster a portfolio’s defense.”
“These exposures can be as traditional as gold, commodities and other real assets,” the report said. “Or investors can venture into the more esoteric strategies, such as options-based or managed futures mandates.”
“Some investors can sustain their portfolios through the volatile market, but others cannot and should look to alternative sources for income,” Ryan said. “Investors should work with a professional to find the income they need while balancing the risk factors. They need to understand what they are investing in” while looking for alternatives.