Why this old school investing strategy is dead

Brian Sozzi · Executive Editor

Thu, Oct 17, 2019, 9:42 AM

The popular notion of holding 60% of your portfolio in stocks and 40% in bonds is unlikely to work in 2020 and beyond, contests Bank of America Merrill Lynch Head of the Research Investment Committee Jared Woodard. High consumer debt burdens that restrict risk-taking in stocks, excess bank de-leveraging that reduces the supply of credit, tech disruption and aging demographics are just several of the reasons Woodard tells Yahoo Finance the 60/40 rule — as it’s called on Wall Street — is over.

“Either global growth & inflation will accelerate, handing huge losses to bondholders, or monetary policy will prove increasingly impotent to confront global secular stagnation, resulting in more frequent recessions and bear markets. The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies,” Woodard points out.

Welcome to the new normal in the markets.

The strategist has a few compelling stats to back up his claims:

$339 billion of inflows into bond funds globally in 2019 versus $208 billion in outflows from global equity funds, both tracking toward a record.
1,100 of global stocks paying yields 300 basis points below global government bonds.
$17 trillion in global negatively yielding debt as of August.
Treasury bonds have returned 27% in the past six months.

Instead of getting so hung up on hard and fast investing rules, Woodard suggests investors get more creative in their efforts to diversify. He is particularly bullish on higher yielding dividend stocks in “bombed out” cyclical sectors, short duration high yield corporate bonds and floating rate loans, and high quality municipal bonds.

Obviously not everyone on the Street believes the 60/40 rule is dead, even if the data suggests hell yes it is.

“I disagree with this view on bonds. We see the Fed as being extremely responsive to changes in the economic outlook and frankly, the market. If stocks gap down 10%, monetary policy is going to respond. So Treasuries offer a real opportunity to get some cheaply priced risk offset,” Mellon senior portfolio manager Roberto Croce said on Yahoo Finance’s The First Trade.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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