Trusted 60/40 investing strategy is broken, and investors should shift away from 'safe' bonds, JPMorgan strategists say

Published Wed, Jul 1 20209:49 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Key Points

For investors who rebalance their portfolios on a 60/40 model, JPMorgan strategists warn they should rethink the strategy in the era of zero yield.
The strategy suggests a 60% stock holding and a 40% portion in bonds, which no longer provide much return or protection against declines in stocks.
Both JPMorgan and BlackRock suggest investors reduce holdings in 'safe bonds' like Treasurys and move into other asset classes.

At the end of the quarter, especially after a big market move, investors like to tweak their portfolios to reallocate some of their holdings. But for investors who out of habit follow the old 60% stocks, 40% bonds rule, JPMorgan strategists have a warning. The strategy that worked for decades, providing an average 10% return, may now only return somewhere around 3.5% a year over the next decade. "In the zero-yield world, which we think will be with us for years, bonds offer neither much return nor protection against equity falls," JPMorgan's Jan Loeys and Shiny Kundu wrote. The strategists recommend other strategies to replace the so-called "safe" bonds portion that no longer works. Instead, investors should consider asset classes that are hybrids between safe bonds and stocks and that have returns more like stocks. They suggest preferred stock, high-yield bonds and loans, collateralized loan obligations, convertibles, commercial mortgage-backed securities, utilities, and equity and mortgage real estate investment trusts. " We think that investors should significantly reduce their holdings of 'safe' bonds. An investor who remains concerned about short-term drawdowns could move to a 20/40/40 of bonds/hybrid/equities," the JPMorgan analysts wrote in a note. "Those more focused on long-term risk should consider 60/40 USD hybrids-equities for a ~5% return and no higher end-of-period portfolio risk." Earlier this week, BlackRock strategists also commented on safe bonds, like Treasurys, that have lost their appeal as the ballast or the portfolio that would provide a hedge against stock market sell-offs. In their second half outlook, they recommended investors look at Treasury Inflation Protection Securities and also investing in the private markets as an alternative. "Managers have a say in structuring the investments and are able to add custom-made resilience. Private markets can give exposures to emerging technologies and other real-economy trends not available in public markets, in our view. And they are bigger and deeper than ever," the BlackRock outlook said. JPMorgan strategists also commented on the longtime rule of 100, and it may be too rigid for investors who could live into their 90s. The informal rule says that an investor's equity allocation should be equal to 100 minus the investor's age. That guarantees a move out of risky assets as the investor ages. "Rising longevity has forced many to move to a rule of 110, if not 120. For 110 or 120, 60/40 is thus the right allocation for people in their 50s, when they save more," they noted.

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At the end of the quarter, especially after a big market move, investors like to tweak their portfolios to reallocate some of their holdings.

But for investors who out of habit follow the old 60% stocks, 40% bonds rule, JPMorgan strategists have a warning. The strategy that worked for decades, providing an average 10% return, may now only return somewhere around 3.5% a year over the next decade.