By Mike Sorrentino, CFA, Chief Strategist, Aviance Capital Management. Reprinted by permission.
The 60/40 Playbook
Over the last three decades, the most common approach to asset allocation was to put 60% of assets into stocks and 40% into bonds. This “60/40” playbook worked well for two reasons.
First, the “40” was supported by falling interest rates, which caused bond prices to rise. A simple index fund was all that was needed to generate good income and still sleep well at night. Second, the “60” was fueled by strong economic growth, which propelled stock prices higher.
However, economic growth that drove stock prices higher over the last three decades is slowing down. Developed markets like the U.S. have become too big to continue historic growth rates, China has doubled in size over the last decade, and emerging markets have emerged.
The 60/40 playbook is a simple solution to simple markets, but there are five long-term challenges that investors now face that demand a new approach.
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