KINNIRY: It's true that there are challenges now for investors with 60/40 portfolios, because of the risks bond investors face. It will be mathematically impossible to replicate the strong returns that bonds have delivered over the last 30 years.
But I'd warn investors who want to leave traditional bonds for more exotic asset classes. It has not been demonstrated that those assets can diversify a portfolio when stocks are falling. We shouldn't expect alternative assets to provide a diversification benefit during the next bear market.
Consider the performance of the larger college endowments that invested in alternative assets over the years. Traditional stock-bond portfolios have been killing many of those endowments in terms of performance. That's been the case whether you go back just one year, or three, five or 15 years. The attempt to get more exotic hasn't worked.
It's true that a lot of alternative assets perform out of sync with the stock and bond markets, so that your portfolio will deliver steadier returns if you invest in alternatives. But the time that you really want diversification is when the primary asset in your portfolio — stocks — is falling sharply.
Vanguard has done research examining the performance of various assets, including alternatives, when stock performance has been the worst — the bottom 10 percent of the performance spectrum, historically. Nearly all the assets posted losses at the same time that stocks were plunging. That was the case for everything from foreign stocks to real estate investment trusts to commodities, high-yield bonds, emerging markets bonds, hedge funds and private equity.
There were only two assets that had positive returns during those periods: Treasury bonds, and investment-grade corporate and municipal bonds. That supports the case for maintaining a basic stock-and-bond mix in a portfolio.
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