Most of the major asset classes posted handsome returns in August, delivering another strong month for multi-asset class portfolios along the way. The Global Market Index (GMI), an unrebalanced, market-weighted mix of all the major asset classes, climbed 1.6% last month. For the year so far through August, GMI is ahead by a solid 7.2%.
Last month’s big winner: foreign corporate bonds, which rose 3.2% in unhedged dollar terms. At the opposite end of the spectrum: emerging market stocks slipped 30 basis points in August, based on the MSCI Emerging Markets Index.
This month we’ve added a new benchmark to our monthly asset class review: a U.S. 60% equity/40% bond benchmark, which is rebalanced back to that mix at the end of each calendar year. The case for a domestic 60/40 strategy in the real world is rather thin, given broad menu of global asset classes available in low-cost ETFs these days. It may have been state of the art for investing during, say, the Nixon administration, but it’s fallen on hard times in the 21st century. Yet the legacy of the 60/40 benchmark as a talking point still resonates. It also performs rather well at times, as the latest numbers above remind.
So, why not simply own a 60/40 domestic stock/bond strategy and forget the rest? Several reasons, starting with the fact that this portfolio will fly (or dive) based primarily on U.S. equities. If you’re willing and able to budget the lion’s share of your portfolio risk to one asset class, the 60/40 portfolio is probably your idea of strategic nirvana.
In fact, if you’re highly confident about the superiority of U.S. stocks on an ex ante basis, now and forever, why not hold a U.S. equity fund alone and be done with it? Well, you might be thinking of the trouble that can arise when you bet the farm on a relatively small opportunity set in a world where the future’s always uncertain.
In case you’re wondering, a 60/40 portfolio doesn’t always win the horse race. Over the last 10 years through last month, for instance, a 60/40 domestic stock/bond mix posted a 6.6% annualized total return vs. GMI’s 6.9%. Rebalancing GMI did even better, earning a 7.8% total return per year. And equal weighting GMI’s asset classes and rebalancing back to equal weights every December 31 generated a 9.4% annualized total return. Adjusting those returns for risk (volatility) further reduces a 60/40 strategy’s competitive edge.
Can you count on those return premia going forward? No, of course not. But unless you’re supremely confident that U.S. equities will shine for as far as the eye can see, a globally diversified portfolio across the major asset classes still looks like a reasonable strategy for an uncertain world.