The Death of the 60/40 Portfolio? Think Again.

The Death of the 60/40 Portfolio? Think Again.

Hollis Walker: This is #NowMe. A podcast for financial advisors and their clients. Hello. This is Hollis Walker with Jan Blakeley Holman, Director of Advisor Education at Thornburg Investment Management. Welcome back. Thanks for joining us for another episode of #NowMe. We’ve got a great show today and a new feature called Ask Jan, where Jan answers questions from our listeners. But first, let’s get started. Hi, Jan. Great to see you again.

Jan Blakeley Holman: Hey, Hollis. Good to see you too.

Hollis Walker: This summer has taken investors on quite the ride, in terms of market volatility. I know you want to share some things that most investors probably missed, and I’m interested in those things myself. What’s on your mind?

Jan Blakeley Holman: Well, you’re not kidding. It’s been a ride, Hollis. It’s been one of those rides like from Six Flags or something that you don’t want to even get on But, I, you know, over the course of my career, I’ve come to believe that as financial services firms put out market analysis information and the media regularly assesses current market conditions, metaphorically, they’re dropping breadcrumbs, much like the breadcrumbs dropped by Hansel and Gretel when they wanted to find their way home. In the case of the financial services media and companies, they’re giving us breadcrumbs that can lead us to future market and investment opportunities but probably not in the way you’d expect. I actually believe that their breadcrumbs lead us to opportunities that are, in fact, at odds with the situation or trend that they focused on. For example, recently, I noticed these three headlines in the financial news. The first said Worst Quarter Since 2008 for 60/40 Portfolios. Another said, Market Rout Sends State and City Pension Funds to Worst Year Since 2009. Now, for the first one to make sense, you have to know what a 60/40 portfolio is and I don’t think a lot of people speak that language. 60/40 portfolio has been around for years and what it is is a basic/traditional portfolio diversification structure that’s achieved by investing 60 percent of an investment portfolio in equities and 40 percent of bonds. In addition to individual investors who use this kind of approach, it’s also widely used by pensions. Now, over the years, the 60/40 portfolio has held up for investors by providing attractive investment returns at low levels of risk, but this year not so much. Because the 60/40 portfolio is comprised of both stocks and bonds, it’s been hit hard by this year’s declining markets. Through June 30th of this year, the portfolio was down close to 17 percent. This less-than-stellar performance is causing some pundits to suggest that it’s time to retire the 60/40 portfolio.

Hollis Walker: That sounds interesting in a sort of scary way. So what else are you seeing?

Jan Blakeley Holman: Well, you’re right, a scary way. The third article that caught my attention, and this one might give you a little buzz of fear was this one, Active Funds Post Worst Half Ever. This article’s summary told us that according to Morningstar, the great industry reporter, from January 1st of this year to June 30th, assets in actively managed mutual funds fell by 21 percent. Now, it’s important to understand that the article focuses on actual redemptions, instead of decline in market value of assets under management at actively managed fund companies. During the first half of 2022, investors redeemed $452 billion from mutual funds, and that’s the highest amount of redemptions ever. Compare that to 2020, when the fear of Covid-19 caused people to bail out of the markets, a time when investors redeemed $275 billion.

Hollis Walker: Okay, I’m a little bit overwhelmed. What is the gist of all these articles? What are they telling us?

Jan Blakeley Holman: Well, you know, I have to go back in time, Hollis, and I think I go back in time a lot and that’s probably because I been in this business a long time, so I have situations or events to compare to and one of my favorites was a BusinessWeek cover story from August 13th, 1979. It said this, The Death of Equities, How Inflation is Destroying the Stock Market. In this story, the authors – and I think by default the publication, because they featured the story on their cover – were reporting on the death of equities as an investment. Imagine that. Now, this article in particular is important because like the recent articles I mentioned, it exaggerated the importance of what was happening, to the point – as you said – this is kind of scaring me. There’s no doubt that many investors sold their stocks after reading that article in 1979 and we have no idea if and/or when they ever got back into the market. Now, equities may have slept for three years but they didn’t die and you’re not going to believe this one – they more than survived, they thrived. It’s been said the bull market of the 1980s began August 13th, 1982, the same date three years later that that article was in BusinessWeek. Wooo! On the 12th of August 1982, the S&P closed at 102.42. On August 12th, 2002, so 20 years later, the S&P closed at 903.80. Recently, the S&P closed at 4,210.24. Now, I’m going to give some numbers here and I think they’re important. People don’t have to necessarily remember them, except they need to remember the trend. So if you look at the 1982 closing of the S&P on August 12th, 1982, go out 20 years to August 12th, 2002, the S&P returned 12.33 percent on an average annual rate with dividends invested. Now, Hollis, would you take that kind of rate of return?

Hollis Walker: Sure.

Jan Blakeley Holman: You’re right you would.

Hollis Walker: Not bad.

Jan Blakeley Holman: The 40-year average annual rate of return of the S&P, because we’re there right now, 40 years later. It’s really weird that we’re talking about this because I went back to that article, found out the date and then all the sudden looked at all these dates together and I’m thinking was this set up? The 40-year average annual rate of return with dividends invested for the S&P has been 10 percent. Equities didn’t die. The exaggeration, the drama, the energy that is put into titles of articles or titles of podcasts, etcetera, it’s to lure us in, to make it feel exciting. Just to give you another example, and I won’t use all of the numbers, but the Dow Jones Industrial Average on August 12th of 1982 closed at 776.92. If you go to 2002, the average annual rate of return for the Dow was 12.86%. I’d take that.

Hollis Walker: Mm hmm.

Jan Blakeley Holman: The 40-year average rate of return for the Dow is 9.46%. Recent articles have obviously – and market, I’m not going to say this isn’t a piece of it – and market volatility have caused investors to bail out of the market. That’s why the redemption numbers are so high, but we know based on history that investors get out of the market at the wrong time. In truth, negative articles that identify a record-breaking trend, like More Redemptions Than Ever or More Money Flowing Into Mutual Funds Than Ever, they should send a message to us that’s the opposite of what they’re saying. For example, investors should now think this is probably the right time to be investing. If everybody else is getting out, I should stay in, be in, maybe put more money in. Likewise, relative to the 60/40 portfolio, I would be thinking it’s the right time to adopt that portfolio mix because a lot of people are saying no, wrong, never do it again, so my advice to investors is think of these as breadcrumbs. What do you think?

Hollis Walker: Okay, Jan, so let me get this straight. I’m thinking that this is a little bit like the psychology of buying lottery tickets. We know that the higher the potential prize goes, the more people buy tickets. But actually, for the odds to be better for them to win, it’s when the amount is lower and fewer people are buying lottery tickets, right? So it’s kind of, you know, we have to think counterintuitively, if everybody else is pulling their money out of the market, hmm, maybe it’s a good time for me to buy. Is that what you’re saying?

Jan Blakeley Holman: That’s exactly what I’m saying. And if the articles and, you know, media segments on TV, etc., news say that a lot of money is flowing out, it’s probably the best time to buy. Now, Hollis. I have to be honest here and say I did buy 15 lottery tickets when it got close to a billion. So, you know something doesn’t always mean that you do it because, of course, you believe that something is going to fall from heaven right into your lap, like a billion dollars.

Hollis Walker: I hope that happens, Jan, and I hope you’ll remember me when that happens for you.

Jan Blakeley Holman: I will.

Hollis Walker: Okay. So, now it’s time for our new segment, Ask Jan. Jan, if I’m not mistaken, you’ve got 46 years in this business. So, if anyone can answer a question on finance, it ought to be you. Right?

Jan Blakeley Holman: We hope so.

Hollis Walker: Okay. Well, let’s start out. I’m going to read this letter Jan received.

Dear Jan, I’m 65 years old and my entire life, I’ve owned apartment buildings. But I’m tired of being the electrician and plumber for five properties, so, I’m beginning to sell my holdings. Now that I’ve sold three of my properties, I’m looking for other investments. I wish I could say I’m an experienced investor, but that’s not the case. I’ve never invested in stocks and bonds because I don’t understand the investment markets, and I find the language intimidating. My friends recommend investing in annuities and inflation-protected treasury securities. Are those good recommendations? Is this type of investing really something I should investigate? Signed, Major Chicken.

Jan Blakeley Holman: Dear Major, first of all, you need to know you’re not a chicken at all. There are real assets and there are financial assets. And you actually are an expert in real asset investing, holding, selling, etc. Now it sounds like you’re interested in diversifying your portfolio to include financial assets. That makes a lot of sense. Your friends are well-meaning, but don’t listen to them. You know, I always blame it on the brother-in-law. When somebody passes away in a couple, the brother-in-law always has ideas on what investments make sense. That’s not what you want to do. Diversifying to financial assets is yet another way to ensure that you’re reducing the risk, your financial risk, because you’re spreading your dollars over more types of investments that fluctuate in price, although as you know, you don’t see those fluctuations in real estate until you try to sell it. But they all fluctuate in price and like a garden, some of them are blooming when others aren’t. Everything doesn’t go up at the same time. That’s important to remember. Now, what would I tell you to do? Well, anybody who’s listened to Hollis and me on these podcasts would know that I’d say, you need a financial advisor. Someone who’s objective. Find out from your friends, ask them that, not what investments you need, ask them do you have a advisor that you’d introduce me to, or that I should interview. Get three names, interview the people, find out what you think. Does the person feel good to be with? Do you feel like they’re interested in your situation more than they’re interested in talking about how they do the business. This is a relationship. A life-long relationship from here. And that’s the person, or the team of people, who will get to know you, your likes, dislikes, idiosyncrasies, your fears, etc. You want a financial advisor. Now, as you listeners can tell, this letter didn’t have a lot of details in it. So, I reached out to Major Chicken, and I asked him some additional questions. Maybe it should be Major Rooster. I asked him some additional questions. For example, what were the value of his holdings. I can tell you, they are significant. He’s in Minnesota, he just built a multi-million-dollar home on one of the big lakes in the Twin Cities, Lake Minnetonka, and he’s got money to invest. But he’s also scared to death to venture outside of his area of expertise, but he wouldn’t even call it expertise. That’s how humble he is. I gave him the name of an advisor, he’s gotten some names from friends. He’s going to go interview them. I think what he’ll wind up doing is probably looking at treasury securities, getting some of the inflation-protected securities, of which you can only buy $10,000 worth right now. Then some low-risk equities. You know, we talked about the 60/40 portfolio and I’ve got to tell you, because of longevity, I more in the camp that more equities are better. So, I would go 80/20, for example. I’m not giving any recommendations to anybody listening to this. But my point is, longevity exists. My mother turned 98 last week. The possibility that I’m going to live a long time is real. I don’t know if that’s good or bad. Do you want my kids’ phone number? Anyway, because that’s real, I have to think about the fact that I could live another 30, 35 years. And I have to own equities. So, Major Chicken is probably going to have own equities. And it’s not the worst thing in the world, I can tell you. He’s got time. He’s got money that he can have in a cash reserve. So, he’ll be fine. And with the right investor, he’ll learn about what he’s doing and become more confident in his abilities.

Hollis Walker: Good advice, Jan. I think I followed all of that. Thanks, Jan. That’s all the time we have today. You’ve been listening to #NowMe with me, your host, Hollis Walker, and Jan Blakeley Holman, director of advisor education at Thornburg Investment Management. If you want to suggest a topic or have a question to ask Jan, email us at NowMe@thornburg.com. If you’d like to hear more episodes of #NowMe, you can find us on Apple, Spotify, Google Podcasts or your favorite audio provider. Or by visiting us at Thornburg.com/podcasts. Jan can also be found on LinkedIn. If you like us, subscribe. Share us on social media and leave us a review. Until next time, thanks for listening.

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