The 60/40 Passive Allocation is Holding Strong In A Rough Market

Despite calls for its death in mainstream financial media earlier this year, the 60/40 portfolio in stocks and bonds is holding strong. A decrease by about 350 basis points from peak year-to-date return is due to the rise in correlation between the two major asset classes. There are risks but this simple portfolio is far from dead.

Below is a chart with price and daily return correlations of SPY and TLT and performance of the 60/40 portfolio.

spy_tlt_20161013

Year-to-date return of the portfolio is 7.93%, off by about 3.5% from a high of 11.56% during last August. The portfolio outperforms the SPY year-to-date return of 6.1%  by about 180 basis points. Year-to-date return for TLT is 10.68%.

Going forward, if the high correlation between SPY and TLT persists and there is a correction in both markets, then the performance of the 60/40 portfolio may deteriorate.  However, I would not go as far as declaring the 60/40 portfolio dead. Since 2003, the 60/40 portfolio has 0.95 Sharpe versus 0.62 for SPY. This is far from being dead already. Although there are alternative schemes for investors, such as “smart beta” and other fancy portfolios constructed via the use of machine learning algos, the 60/40 portfolio is a “simple” and cheap way out of this hype and any potential risks associated with it.

In comparison, the year-to-date  return of the Price Action Lab SPY-TLT-GLD-DBC portfolio with weights 50%-30%-10%-10% is 9.5%, down about 4.5% from the August highs.

port_20161013

This portfolio reduces equally allocation in stocks and bonds to add gold and commodities/energy.

If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY

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Charting and backtesting program: Amibroker
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