Nearly half of all advisors are using some sort of tactical investment strategy, according to new research from Cerulli Associates. This important research quantifies what we have been witnessing—advisors are actively seeking alternatives to the 60/40 buy-and-hold investment approach of the past.
Why? The 60/40, stock/bond asset allocation model favored by most investment houses and embraced by advisors for a generation is outmoded and not likely to help investors achieve their objectives.
We are in an investment environment that offers historically low traditional investment returns. Today, the projected return on the traditional 60/40 model is the lowest in 140 years at 4.26 percent (excluding management fees), according to Research Affiliates LLC.
A better definition of a balanced portfolio today is 33/33/34. Enhanced Modern Portfolio Theory didn’t fail the last 12 years; the failure occurred in the construction process. The risks were too concentrated because the solutions were unavailable to most investors. Today, the solutions exist for all investors and advisors.
More importantly, there are a number of ways to protect long equity and fixed-income exposure. And there are several outstanding liquid tactical risk diversifying solutions to consider. The goal is to enhance overall portfolio return and reduce risk.
A balanced portfolio today is comprised of 33 percent equity (hedged from time to time), 33% fixed income (tactically managed) and 34% tactical-trading-alternatives. Of course, each investor will allocate differently based on risk level, age, needs, time horizon, etc.
I do believe that 8 percent to 10 percent returns are achievable over time. We favor an enhanced MPT portfolio construction approach to increase return and reduce portfolio risk. It involves a risk-managed approach towards beta, a careful view on bonds and inclusion of a select handful of tactical-trading-alternative strategies. It is a shift from 60/40 to 33/33/34.
The chart below is the math on 4.37 percent courtesy of my friends at Research Affiliates. The green line reflects the forward 10-year expected return while the blue line reflects the realized return. Note the high correlation of what was expected and what was ultimately realized. Could it be different this time? Maybe. I don’t like the odds.
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