The outlook for the traditional investment portfolio 60:40

However, according to a recent report from Morgan Stanley, through June 30 of this year, a 60:40 portfolio of US stocks and the overall bond index lost about 16% of its value, erasing all 60 gains: 40 since September 2020. in Europe suffered a similar fate, according to the data.

In India, a 60/40 portfolio comprised of the S&P BSE 500 Index and the S&P BSE India Bond Index is also in the negative zone, but fared much better than its global peers, down -2% to to July 31.

In the Indian context, a moderate investor who wants to beat inflation and doesn’t want to take a lot of risk is betting on a 60/40 portfolio. This strategy also works for those who have already built their wealth and now want to focus on saving their investments.

Globally, the 60:40 investing strategy has been a mainstay of portfolio construction over the past few decades because it typically works because stocks and debt have a negative correlation. However, stocks and bonds have fallen in tandem this year, raising questions about this strategy.

Inflation has been on the rise and to combat it, global central banks have gone on a frenzy of raising interest rates. “Rising interest rates have reset equity valuations. And while in the long run stocks tend to beat inflation, in the short term this impacts the calculation of the risk-free rate. Valuations therefore appear to be correcting. Similarly, when rates rise, the net asset value (net asset value) of debt funds suffers, depending on the duration of the papers,” said Rishad Manekia, Founder and Managing Director of Kairos Capital.

Given the high inflation scenario, a 60:40 portfolio is on track to yield negative net returns this year for the first time since 2018 in India.

However, returns will also depend on the type of asset allocation and papers you put in the portfolio.

Kirtan Shah, Founder and CEO of Credence Wealth Advisors, suggests splitting the equity allocation evenly between large, mid and small cap stocks. “Also, your debt side of the portfolio should be largely on the duration risk-taking side.”

Shah believes interest rates will plateau globally, provided tensions between China and Taiwan do not escalate. “Rates are going to start going up, so the duration of a coin will be very attractive for the next 2-3 years. fixed rate, you can easily beat inflation,” he said.

An alternative to a 60/40 portfolio is to invest in separate equity and debt funds or hybrid funds. The advantage is that rebalancing inside a hybrid fund does not attract an exit charge or tax, however, the disadvantage is that an investor will not have a say in the allocation to equity market segments.

Direct investment or not, experts warn that 60:40 is not a magic formula that investors can follow blindly.

The key aspects of building a portfolio are understanding its risk appetite and investment horizon.

“For example, if an investor is 35 years old and has 20-25 years of investment life left, it would make very little sense to invest in a 60:40 formula. If you basically create five buckets, a buckets will obviously have a 60:40 allocation, which will suit 20% of people. This is not a silver bullet or a formula that everyone should follow,” said Amol Joshi, founder of Plan Rupee Investment Services.

According to experts, an aggressive Indian investor can consider an 80:20 or 90:10 portfolio, which is stock-oriented. On the other hand, a conservative portfolio should have 80% of the allocation in fixed income securities and the remaining 20% ​​in equities. “Someone who is young and has 10-15 years of investment horizon or more can digest the volatility. For them, an 80:20 or 90:10 stock portfolio would make more sense,” said said Shah.

While the 60:40 Portfolio may be an ideal portfolio for some, it should be customized to their income and goals.

“Given high inflation, you may want to consider increasing your long-term equity investments. Liquid funds that offered 3.5% returns in recent months are now offering 4.7% and should rise to 5.25%, which should support your other debt investments,” said Adhil Shetty, CEO of BankBazaar.com.

Ideally, a 60/40 portfolio is based on debt and stocks. But given the state of inflation, adding other asset classes may make sense. “You can consider investing in gold as a hedge against stocks and bonds, but keep it below 5% of your overall portfolio. Gold experiences long periods of stagnation followed by short, sharp spikes in Gold returns over the past year have been negative and the 10-year return is around 5-6% (annualized),” Shetty said.

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