No one can agree whether the main purpose is to diversify or to reduce risk — and they aren’t quite the same thing.
I am not a fan of one-size-fits-all financial strategies. Yes, I see the value of making investment as simple as possible, but the right balance of risk and reward is a personal decision, and the most common strategies are either arbitrary or agnostic about crucial details.
Which brings me to the subject of this column: the popular yet endlessly criticized 60/40 asset allocation strategy. With bond prices tanking and correlations flipping, last year the 60/40 portfolio had its worst returns in decades. Then again, maybe that was just a blip and investors just need to wait it out.
Whether 60/40 is failing or just having a bad year comes down to how you define success. And the main problem with a 60/40 portfolio is that its objective is so poorly defined. A transition to a high-rate environment will mean choppy markets for years to come, and this will test the simple strategies the finance industry relies on. The ones that will fail will be the ones that aren’t clear to start with.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
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