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 one of the world’s largest 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.
He comments: “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.
“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 continues: “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 Nigel 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.
He concludes: “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.”