Additionally, short-term volatility is typically more extreme in equities than in fixed income. That means you need discipline to avoid making the classic mistake of selling in a panic, but also be realistic about your time horizon. Holding pat might be fine for someone in their 20s or 30s who has many years to ride out any slumps, but far more problematic for someone looking to retire in a shorter time frame.
One option is to make sure you aren’t just holding stocks purely for expected share price growth.
Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott, says he’s seen a trend of clients incorporating more dividend-paying stocks into their portfolios to make up for the income that’s lacking from high-quality fixed income.
“Select companies whose dividend policy has been supported by the quality of their balance sheet as well as management’s commitment to sustain or raise it regularly,” Luschini said.
Don’t go for plain vanilla
“Owning defensive assets like government bonds still makes a lot of sense,” said Anthony Doyle, a cross-asset investment specialist at Fidelity International. “But only in order for you to take more risks in other parts of your portfolio.”
In its original iteration, 60/40 investors would only hold U.S. Treasuries in their fixed income portion. Those days are long gone. Nowadays, via either managed funds or ETFs, retail investors can access a much wider range of credit, both corporate and sovereign.
“Fixed interest allocations of portfolios should be diversified in their own right,” Martin Hennecke, Asia Investment Director at wealth manager St James’s Place said. And that doesn’t just mean different sectors or geographies. Hennecke also warns investors against owning too many long dated bonds, which may sell off in the event a rise in inflation triggers higher interest rates.
If keeping pace with inflation is your concern, you can also consider inflation linked bonds.
At Schroders, Doyle says he’s been focusing on building out assets that sit somewhere between equities and bonds.
That means upping the allocation to things like corporate credit, emerging market debt, private loans and commercial real estate lending. “These are things which aren't as risky as equities but certainly have a bit more risk in them than say a sovereign bond,” Doyle said.
Stuart Fechner, director of research relationships at Australian fund manager Bennelong, also points to newer assets like global listed real estate and infrastructure as ways to get some more diversity into retail portfolios.
Whether cryptocurrencies like Bitcoin or Ether can — or should -- be part of a balanced portfolio is a hotly contested subject. Proponents argue it’s uncorrelated to other assets, and so can offer a good hedge.
Skeptics liken it to gambling and warn investors they could be wiped out. The middle road, which is increasingly being advocated by Wall Street strategists, is to explore a small allocation, which wouldn’t take too much of a hit even if crypto prices go down substantially.
An allocation of 1% could boost risk-adjusted returns without taking on too much exposure, JPMorgan Chase & Co. strategists said in a recent note.
If you need a hand, there are half-way houses
Many professionally managed 60/40 funds operate based on ranges, allowing the portfolio manager to tweak allocations compared to the risks and opportunities they see at the time.
If you aren’t up for taking on that rebalancing task yourself, yet are nervous about high fees, there are alternatives. Morningstar’s Benz suggests that for those who want set-it-and-forget-it simplicity, a good first option is a target date fund where a professional manages asset allocation to deliver returns by a pre-defined end date. While it’s typically a bit more expensive than a straight index fund, they’re normally cheaper than more active options.
There also is a growing band of digital start-ups that aim to give you a smoother ride. One of those, StashAway, which has about $1 billion in assets under management, rebalances its clients portfolio based on economic conditions and their risk profile.
“60/40 is a fine place to start, but it doesn’t give you consistent risk over time,” said Stephanie Leung, an ex- trader at Goldman Sachs Group Inc. who now runs StashAway’s Hong Kong operation.
This article was provided by Bloomberg News.