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Revisiting 60-40 Portfolio Allocations in the Wake of Volatility

December 6, 2024 | 1 minutes reading time | By Michael Shari

Institutional investors winding down balanced stock-and-bond portfolios must manage the illiquidity of private equity, private debt and real estate alternatives.

Since the early 1990s, balanced funds – holding 60% of assets in stocks, 40% in bonds – have been a go-to strategy for institutional and individual investors alike. It is based on a popular interpretation of Modern Portfolio Theory, for which Harry Markowitz won the Nobel Prize for economics in 1990.

The reasoning, says chief investment officer Michael Rosen of Angeles Investment Advisors in Santa Monica, California, “is that stocks accrete wealth over the long term, while bonds provide a moderate but positive real yield – real meaning over inflation – and hedge against equity declines.”

Confidence in this compartmentalized design plummeted amid the inflation- and interest-rate-fueled volatility of 2022.

“It’s not the fraction that you have in stocks versus bonds that stabilizes your risk. It’s the amount of risk of that mix you have,” explains MIT Sloan School professor and Nobel laureate Robert Merton. “By keeping it in proportion, the volatility of the portfolio is varying all over the place depending on what happens to the changing volatilities in the stock and bond markets.”

Measuring volatility as the potential of a publicly...

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Topics: Investment Management

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