Changing formulas: Why the 60-40 stock-bond split is likely outdated

FAN Editor

The 60-40 stock-to-bond ratio is quickly falling out of favor.

The old-line investment strategy’s appeal has worn off as investors turn to new areas of the market for diversification, two market analysts told CNBC’s “ETF Edge” this week.

John Hollyer, principal and global head of fixed income at Vanguard, said in the Monday interview that 60-40 is no “magic number.”

“True expected returns, because of low bond yields, are not as high as they once were. We’ve been through a 40-year secular decline in rates. But equity valuations are also high,” he said.

“[For] an investor who’s calculating things like their wealth, their risk tolerance, their time horizon, I do think there’s still value to a diversified portfolio where asset returns may offset one another.”

As more and more investors flock to large-cap U.S. stocks, diversification should be top of mind, Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database, said in the same “ETF Edge” interview.

“What I would encourage investors to do is to think about diversification more broadly,” he said, adding that “60-40 is probably the correct allocation for exactly nobody.”

“Most investors would probably do a good job if they looked at their portfolio, figured out if they’ve actually addressed their home biases, [and] figured out if they actually believe in their portfolio, whether it’s the stock end or the bond end,” he said. “I think you’ll find most investors are pretty barbelled.”


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