Bank of America declares the "end of 60-40" standard portfolio

Investors have long been told that the ideal portfolio should carry 60% of its equity stake and 40% in bonds, a mix that provides greater exposure to historically superior stock returns, while providing diversification benefits and lower risk of fixed investment.

However, in a research note published by Bank of America Securities, entitled "The End of 60/40," portfolio strategists Derek Harris and Jared Woodward argue that "there are good reasons to reassess the role of bonds in your portfolio," and to allocate a larger share to shares.

"The relationship between asset classes has changed so much that many investors are now buying stocks not for future growth, but for current income, and buying bonds to participate in price increases," Harris and Woodward wrote.

$ 339 billion in inflow to bond funds globally in 201[ads1]9, and $ 208 billion in outflow from global equity funds underlines the power of the ongoing bond rally, which has caused bond yields to fall enough to reach 1,100 global equities yields dividends above average yield on global government bonds.

Bank of America Securities

Bank of America Securities

As global economic growth slows and the population of developed market economies age, traditionally safer assets such as bonds have grown in popularity and helped create a "bubble" in the bond market. that threatens to derail returns for investors who maintain a typical split of 60-40, according to the BofA analysis.

"The challenge for investors today is that both the benefits of bonds, diversification and risk reduction appear to be weakening, and this is happening at a time when positioning in many interest rate sectors is incredibly crowded, making bonds more The authors wrote as vulnerable for sharp, sudden provisions when active managers are rebalanced.

"The core premise of every 60/40 portfolio is that bonds can hedge against the risk of growth and stocks can hedge against inflation; Their return is negatively correlated, ”adds Woodard and Harris. “But that assumption was only true for the last two decades and was largely untrue for the past 65 years. The big risk is that the correlation can turn around, and now is the longest period of negative correlation in the story towards the end when policy makers hit markets in an attempt to boost growth. ”

Bank of America Securities

Meanwhile, higher bond market volatility has led US Treasury debt to yield less risk-adjusted returns over the past three years than any asset class other than commodities, while the popularity of bonds has forced investors to take greater risk of getting the same return. [19659002] "Crowded positioning means that natural fluctuations in bond prices can worsen as active investors rebalance their stock or macro outlook changes," Harris and Woodard write.

Instead of US government debt, the authors advise investors to add more exposure to equities, especially equities with high yields in underperforming sectors, including finance, industry and materials, which can be bought at affordable valuations.

"The future of asset allocation may look radically different from recent times," it wrote, "and it's time to start planning for what comes after the end of 60/40."

Tuesday S&P 500

SPX, + 1.07%

was about 1% below the record close of 3,025.86 set July 26, while the Dow Jones Industrial Average

DJIA, + 0.96%

was around 1.2% below its record finish of 27,359.16 set on July 15, and the Nasdaq Composite

COMP, + 1.27%

was around 2.3% away from record completion 8,330.21 scored July 26.

Return on the 10-year US state tax

TMUBMUSD10Y, + 2.37%

rose to 1.754% from 1.748% late Friday. Bond markets were closed Monday for the Columbus Day holidays.