The time-honoured 60/40 investment portfolio is not fit for purpose in today’s sky-high inflation environment, warns the CEO and founder of a major financial advisory, asset management and fintech organisations.
The stark warning from Nigel Green of deVere Group comes as UK inflation hits a 30-year high of 7%, U.S. inflation accelerates to 8.5% hitting a four-decade high, and Eurozone inflation soars to a record 7.5%, more than triple the ECB target.
“Around the world, inflation is sky high and it’s getting worse. It appears to be anything but ‘transitory,’ as many had been hoping even a couple of months ago”, Green says.
“As it erodes the purchasing power of money, outstripping inflation is most investors’ primary goal. For about half a century, investors have been able to create, grow and protect their wealth using the 60/40 portfolio model. 60% stocks and 40% bonds were enough to hit both goals of capital appreciation and capital preservation.”
“This is no longer the case,” he explains.
“Stock market valuations remain near historical, all-time highs, which is particularly of concern as the cost of capital is no longer free. Meanwhile, bonds, a major part of most portfolios for decades, offer neither yield nor an inflation hedge. Nowadays they don’t rally as they used to when stocks sell-off due to the low yields.Therefore, in this environment, the 60/40 investment portfolio model is dead; it is no longer fit for purpose.”
In order to achieve long-term portfolio growth, says Green, investors should keep some of their wealth in cash for everyday spending requirements, and a rainy day or emergency fund, and also consider increasing their exposure to significantly more diverse, and perhaps more volatile, investment opportunities.
A good fund manager will help investors seek out the opportunities and mitigate potential risks as and when they are presented to generate and build their wealth.
“With valuations near all-time highs and yields at all-time lows, the time-honoured 60/40 portfolio is unlikely to outpace inflation nor offer considerable downside protection. Investors should review their portfolios sooner rather than later to ensure they remain on track to reach their long-term financial goals.”