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Searching For An Alternative To The Traditional 60/40 Portfolio [Premium Articles]

After a rare period of falling stock and bond prices, questions about the efficacy but also the viability of the traditional 60/40 portfolio have been raised. We discuss some of these issues and potential alternatives. Access to the article requires a Premium Articles subscription or an All in One subscription.

As far back as June 2017, we warned about the risks of the traditional 60/40 portfolio and discussed an alternative tactical allocation with 70% invested in the portfolio and 30% in a forex trend-following program.

Tactical asset allocation is not for everyone and many investors prefer strategic allocations with rebalancing frequencies that minimize turnover and tax implications. There are trade-offs and no free lunch.

The 60/40 portfolio in SPY and AGG ETFs is down 16% year-to-date, but the drawdown is still within historical extreme levels. However, investors anticipate a long period of higher yields and a recession, which may cause portfolio losses to accumulate. This has prompted a search for alternative solutions to traditional 60/40 allocation.

There is bad news for those looking at major markets as potential substitutes for the bond market in the 60/40 allocation. For example, commodities markets have had wild swings historically, making them unsuitable substitutes.

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Gold has also been erratic with large drawdown and long periods of stagnation, while also subject to wild swings.

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Turning to the US Dollar, the chart does not offer any hope that this can serve as an alternative to bonds. This is a very erratic market subject to wild swings.

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There is no major market that can offer an alternative to bonds, which recently have experienced the largest drop in the last several decades. Long-term bonds are down more than 35% and short-term are down more than 13%.

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S&P US Treasury 20+ Year Total Return Index

blankS&P US Aggregate Bond Total Return Index

An Alternative 60/40 Allocation

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Specific disclaimer: This report includes charts that may reference price target levels determined by technical and/or quantitative analysis. No updates to charts will be provided if market condition changes occur that affect the levels on the charts and/or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

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