One of my good friends runs a boat chartering business.
She does quite well for herself. But she’s too busy to manage her own money. She has a Morgan Stanley guy to do that for her.
But there’s one problem…
Her adviser put her in all sorts of dumb bond investments. When she told me about it, I was furious.
You see, a lot of financial advisers get paid to invest their clients’ money in bond funds.
They don’t have their clients’ best interests in mind. Instead, they put your money where it will be most profitable for them.
What I mean by that is that certain financial adviser companies get fees for investing their customers’ money in other bond funds. They get paid even if these don’t provide great returns for their customers.
And my friend’s story is all too common.
Many advisers like to push the traditional 60/40 portfolio. They’ve relied on it for decades.
If you have a financial adviser, chances are you have some of your money split up that way. But I’ve got bad news for you.
The 60/40 portfolio doesn’t work like it used to when bonds were yielding much higher percentages.
Really, it hasn’t worked like that since the distortion I’ve been telling you about took hold and brought with it ultra-low yields.
So if your adviser has you in that sort of split, it may be for their own benefit – not yours.
Let me explain…
Another Side-Effect of the Distortion
Since the 2008 financial crisis, central bankers have distorted every part of our lives. If you read Monday’s Inside Wall Street, you know what I mean.
The classic 60/40 portfolio is one more example. It’s still by far the most common investing strategy followed by financial advisers.
And there is a good reason for that: Liability.
As long as advisers have you in a balanced portfolio, they can claim they’re doing their financial due diligence.
60/40 portfolios split your money into equities and bonds. Usually, it’s 60% in stocks and 40% in bonds.
If you go to a financial adviser, they will tell you this old, diversified approach is best. They will preach that you should have both secure (bonds) and risky (stocks) assets in your portfolio.
The logic is simple enough. When stocks do well, they flatter the performance of the portfolio. When stock prices fall, bonds do well.
Bonds also supply guaranteed income. That allows bonds to soften the blow from volatility in the equity market.
A Broken Relationship
And that’s not the only reason the 60/40 portfolio is the most popular asset mix offered to retail investors.
Advisers will also tell you the strategy has a long history of generating strong, consistent returns.
For decades, bonds and stocks moved (more or less) in opposite directions. Traditionally, when one went up, the other went down. By owning bonds alongside stocks, you got a convenient hedge.
But here’s what your adviser probably won’t tell you: That relationship has been breaking down as of late. You can see this in the chart below…
Over the last year or so, you can see bonds and stocks moving (more or less) in the same direction at the same time.
Also, bonds significantly underperformed stocks. The S&P 500 jumped 21.5% in 2021. Meanwhile, the 20+ year Treasury Bond Fund (TLT) fell 3.5%.
That means bonds failed to offer a hedge against risk in the stock market, one of their traditional roles.
And the timing of the moves resulted in bonds dragging down the performance of the 60/40 strategy.
That’s one of the greatest examples of distortion I’ve found. When we look at the superficial data, it says one thing. When we look under the hood, it says something completely different.
Take BlackRock’s 60/40 Target Allocation Fund (BIGPX), for example. It holds a globally diversified portfolio of bonds and stocks. It returned just 6.1% over the last year.
In other words, that 60/40 blend even underperformed inflation, which recently hit 7%. That’s not what you want from a portfolio that claims to be the “safe” choice.
At the very least, you’d want any investment you make to beat the rate of inflation. Otherwise, what’s the point?
And if the Federal Reserve raises interest rates, as it says it will, bonds could suffer even more. The rest of the portfolio would need to hedge that risk in bonds. Right now, the 60/40 model is not suited to that task.
So where can we look instead?
Follow the Big-Money Players
The answer is, we need to look beyond the traditional portfolio. We need assets that can give us the same protection against risk and potential for consistent gain as the 60/40 portfolio did in the past.
Your adviser will never tell you that. Advisers look at clients like gym memberships. Most people pay but rarely attend. And most advisers don’t get paid for performance. They get paid for the volume of money they are managing for you.
Advisers think less communication is the key to them holding onto our money. Which is why we have to think beyond the 60/40 split.
Just look at what the big institutions are doing.
The major university endowments abandoned the 60/40 model years ago. The most successful ones have been investing in alternative assets for decades.
In fact, over the last 20 years, adding alternative assets to their portfolios improved their average performance by 38%, annualized. That’s going by research from the Chartered Alternative Investment Analyst (CAIA) Association.
In the past, these alternative investments meant things like private equity and venture capital. Both were out of reach for most investors.
But today, regular investors have the same opportunities as institutional investors. And that’s thanks to the evolution of what I call New Money. What do I mean by that?
As you know if you’re a regular reader, New Money is one of the top five themes on my radar for 2022. It’s challenging the established financial players and fiat monetary system.
For example, we’ve seen the rise of new asset classes in the last 14 years… from fintech (financial technology) to cryptocurrencies.
This revolution in New Money has helped bolster portfolios when bonds and stocks fail. It’s no wonder that major university endowments have dipped a toe in crypto in recent years.
Here is crypto news site CoinDesk with more:
Back in 2018, Yale University Chief Investment Officer David Swensen made headlines by backing two crypto-focused venture funds… [One was] run by Andreessen Horowitz and another launched by Coinbase co-founder Fred Ehrsam and former Sequoia Capital partner Matt Huang.
Several other universities followed Yale in backing crypto VCs [venture capital funds], including Harvard, Stanford, Dartmouth College, MIT, University of North Carolina and Michigan.
As we’ve seen in recent weeks, sometimes all assets rise and fall together, including cryptocurrencies.
But even with volatility in the short term, the gains these assets make in the long run bring the stability many portfolios need.
And today, you can take a page from the big-money players’ book.
By adding small positions in New Money assets to your portfolio, you can boost your total return, too. And that’s without exposing yourself to too much risk from the bond market.
In future, maybe we’ll look at 55/25/10 as the ideal portfolio. Meaning we’ll use fintech and other New Money assets to act as anchors during times of stress.
What This Means for Your Money… And Financial Freedom
In short, cheap-money policy has distorted every part of our lives. The once-trusted 60/40 portfolio is one more victim of that distortion.
As I’ve written before in these pages, that distortion isn’t going away. But you don’t have to be a victim of it, too. You can adapt to overcome the challenges.
That means trying new strategies that provide solutions to a changing world. And that’s something you can’t get from an adviser who only cares about their commissions.
Financial freedom starts with taking control of your own future – and embracing change. That’s what I’m here to help you with.
Happy investing, and I’ll be in touch again soon.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins