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By Josh MacRae*
A common investment strategy you might know of is the so-called 60/40 principle. This is when you put 60% of your money in stocks (like the big companies in the S&P 500 Index) and 40% in bonds (like government or corporate bonds). This is a method that’s been a staple of the investment industry for decades, but recent market volatility has some questioning whether it’s still relevant.
You might also be wondering: is it still a good plan for you in 2024? Let’s take a look.
A proven strategy
The 60/40 strategy was like a dependable recipe for managing your money. Stocks gave you a chance to grow your wealth, while bonds kept things stable when the stock market got rough. It was an easy and smart way to look after your long-term investments. Here’s why it was so reliable:
Growth from stocks: The 60% in stocks, mainly big companies, was where you could grow your wealth. These companies often see their value increase over time, which means your investment could grow too.
Stability from bonds: The other 40% was in bonds, which are kind of like loans to the government or companies. They paid back a steady amount, so they were like a safety net. When the stock market got shaky, these bonds helped keep your investments stable.
A balanced mix: This combination was great for long-term investing. It offered a mix of the potential high rewards from stocks and the steady, reliable returns from bonds. It was simple yet effective for people looking to steadily build their wealth over time.
But in recent years, this dependable strategy has faced some challenges. It’s not that it’s a bad idea now, but it might not work as well as it used to due to changes in the market.
Not business as usual
The past few years have seen some stark deviations in how the equity and bond markets behaved, casting some doubt on long-held investment truths.
For instance, the bond market faced a disaster in 2022 when rising yields and inflation fears held back bond returns. This made things especially unpleasant for investors who rely on fixed income assets to offer some stability at a when uncertainty ruled the equity markets.
Likewise, the past few years have seen major indices like the S&P 500 losing more than 20% of its value one year to rocketing in value by that, and more, the next year.
These market moves meant that the traditional 60:40 strategy was suddenly less efficient at balancing portfolio returns because markets weren’t behaving as per usual.
What does the future hold
One of the big talking points this year has been the expectation that central banks will begin lowering interest rates. When this might happen is still open for debate, although later rather than sooner appears to be the dominant view.
When rates do fall, this could breathe new life into the traditional 60/40 strategy. Why? Because when interest rates go down, the value of bonds usually goes up. This makes the bonds in your portfolio more attractive and potentially more profitable.
And despite their recent roller coaster ride, they’re starting to look a bit more promising. Bonds are now offering better returns than they did a while ago. This means they’re not just a safety net anymore, they could actually be a source of steady income for your portfolio.
And let’s not forget about stocks. Despite fears of a bubble given the growth in equities this year, stocks – especially the well-established companies – have a history of weathering market ups and downs. So, they might not skyrocket overnight, but they’re likely to provide steady growth over time.
3 ways to fine-tune your strategy
Given this background and the uncertainty that the future holds, I propose the following three ways you can fine-tune your investment strategy in 2024:
1. Explore more options
Don’t just stick to stocks and bonds. Explore alternative assets like real estate, commodities, and private markets.
2. Be flexible
Change your strategy based on how the market’s doing. Maybe lean more towards stocks when things look good and switch to bonds when it’s not so clear.
3. Smart choices
Look at different styles of investing. You can focus on things like value, momentum, and quality strategies that leverage changing market dynamics. These can enhance returns without compromising stability.
The long and the short of it is that the 60/40 strategy isn’t outdated, it’s just changing.
This year, it’s all about balancing risks and rewards carefully. As banks adjust interest rates, you need to think outside the box. The 60/40 approach may not be the showstopper it once was, but it’s still a solid part of your investment game plan.
If you have questions about applying this strategy or how to balance your portfolio appropriately, then reach out to a qualified financial advisor. We’re trained to help you make the right decisions based on your current circumstances and your future goals. With an advisor at your side, you needn’t worry about technicalities like 60:40 splits in your portfolio. All you should focus on is staying the course and steadily building up your retirement savings pools.
* Josh McRae is a Financial Advisor under the direct supervision of Brian Butchart at Brenthurst Wealth Granger Bay, Cape Town. [email protected]Â
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