60/40 can work for some investors

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Your tolerance for risk will drive how much of your portfolio should be in equities. Over time, stocks tend to produce better returns, but they don't offer the safety of fixed-income investments.

To be sure, the 60/40 formula still has a place for investors seeking a more passive model — or those who get nervous every time the markets dip. It’s a proven formula for someone who wants consistency and minimal risk.

“It’s a middle-of-the-road, consistent long-term strategy that is not going to make you rich,” Karram says, “but you’re probably not going to lose all your money either.”

Still, some investment advisors have questioned the approach in today’s investing landscape, which looks a lot different than when the 60/40 rule was popularized decades ago.

They have good reasons. Back in 2000, investors with ten-year Treasury bonds generated about six per cent on their money, providing a healthy balance and protection against stock volatility, in an investor’s portfolio. But last summer, the yield on the ten-year Treasury fell below 0.5 per cent.

That has investors looking at other assets to replace that fixed-income component of their portfolios.

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Alternative asset classes

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Many investors worry that long-popular stock and bond portfolios won't keep up with inflation, particularly with average life expectancies rising. To compensate, they're turning to alternative assets such as private equity, venture capital, real estate, hedge funds and private credit.

Joel Clark, CEO and portfolio manager for wealth management firm KJ Harrison Investments in Toronto, says there are five main investments that can serve as alternatives to traditional stocks and bonds: private equity, venture capital, real estate, hedge funds and private credit.

Yet alternative assets have their own risks. And for those nearing retirement, managing risk and volatility is especially important because people are, in general, living longer and fewer of them can rely on employer-provided pensions to provide retirement income.

“People should have a base expectation that their portfolio needs to last them generally longer than originally planned,” Clark says, “and we’re going to have to get used to a bit more volatility because they’re going to be in asset classes that are much more sensitive than traditional, safer income streams.”

Thanks to technology, the average investor has access to far more information and a wider variety of investing options than prior generations.

“The stuff that’s shaking the ground right now are ETFs [exchange traded funds], crypto, even real estate,” says Lesley-Anne Scorgie, founder of financial education organization MeVest. “That’s what people are talking about. They’re not talking about bonds anymore.”

Scorgie says investors should review their risk profiles every two years because of the market’s changing dynamics.

Diversification, inflation and timing

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With bond yields dipping, many investors are turning to real estate investment trusts (REITs) to produce steady, bond-like returns.

Alternative investments are not for everyone. Hedge funds, which can offer both diversification and greater returns, for example, are targeted toward wealthy investors.

Experts note hedge funds often invest in private companies, distressed debt, currencies and commodities and, for the most part, are not available directly to retail investors due to the varying risk profiles of these investments.

Wealth managers who offer these funds spend considerable time with clients to drill down on risk tolerance before placing capital in this asset class.

Real estate can also generate reliable income like a bond, but these days purchasing property in many parts of Canada can be cost prohibitive.

“There’s always going to be the little bird on someone’s shoulder telling them to get in the real estate market,” Scorgie says. “But the way housing prices have gone it’s become less and less viable for people to buy into that asset class.”

There is an alternative, though. A real estate investment trust (REIT) lets investors purchase shares in companies that own and operate properties ranging from office buildings, hotels, apartments and even clusters of single-family homes.

Investors earn a share of the income produced from these real estate portfolios.

Clark says much of the future investing climate will depend on what happens with inflation. While it seems to be heading up now, it could slow after the recovery.

“If you're in an inflationary environment, you want to own commodities and reopen stocks, whereas if you're in a deflationary environment you want to own bonds, gold,” Clark says. “And so you have to tilt your portfolio one way or another based on the environment you think you're going into.”

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About the Author

Nancy Sarnoff

Nancy Sarnoff

Senior Reporter/Editor

Nancy Sarnoff is a senior reporter and editor at MoneyWise. Previously, she covered commercial and residential real estate for the Houston Chronicle where she also hosted Looped In, a podcast about the region’s growth, development and economy. Her work has been recognized by the National Association of Real Estate Editors and the Society of American Business Editors and Writers.

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