[SINGAPORE] The 60/40 portfolio – allocating 60 per cent of one’s investments to equities and the remaining 40 per cent to bonds – has been a commonly touted investment strategy. But analysts warned that macroeconomic uncertainties – including the direction and impact of interest rates and trade tariffs – are throwing this strategy of maintaining a well-balanced, diversified portfolio into disarray.
The way DBS chief investment officer Hou Wey Fook sees it, current macroeconomic conditions have rendered the 60/40 portfolio investment strategy suboptimal.
For moderate-risk investors, the 60/40 portfolio allocation has been a popular rule of thumb as it seeks to balance the higher risk and higher return potential of equities with the lower risk and stability of bonds.
But the 60/40 strategy is not foolproof; in a recent example, it faltered in 2022 when both bonds and stocks suffered negative returns – leaving some market watchers wondering if it is wise to continue to deploy this allocation strategy.
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Hou notes that interest rates are widely expected to fall, which traditionally would support a rebound in the appeal of the 60/40 portfolio. But he cautioned that investors must watch out for the risks.
“The huge US fiscal deficits have diminished the efficacy of rate hikes in taming inflation,” he said. “Only selected buckets of quality bonds can catch the tailwinds of rate cuts.”
Hou added that the most recent tariff-driven sell-offs in both equity and Treasury bonds highlighted that there is no guarantee for equity-bond correlations to tilt in favour of the 60/40 strategy, even amid ongoing rate-cutting cycles.
Ong Ming Yi, a portfolio manager at PhillipCapital, said investors should aim for a portfolio that presents the highest returns. Currently, this means allocating 100 per cent of the portfolio to stocks despite the higher volatility.
“In terms of dividend yield, (investors) will not get much with bonds as compared to stocks,” Ong told The Business Times. “Stocks beats bonds by a margin of at least two times.”
He added that although stocks present higher risks, the Sharpe ratio – which adjusts returns for risk – still favours equities.
“The largest bond fund in the US has a negative Sharpe ratio, meaning it underperforms even risk-free Treasury bonds,” Ong said.
“So if you have a three-year buffer in savings, it makes more sense to go 100 per cent equities – you do not have to touch your investments during a drawdown; and historically, stock drawdowns do not last more than three years,” Ong noted.
In light of US President Donald Trump’s tariffs, Ong said he has re-aligned his portfolio into investing in stocks that could potentially benefit from trade protectionism, such as companies that largely receive their raw materials from the US.
Looking ahead, Hugh Chung, Endowus’ chief investment officer, warned that high inflation could present another risk for investors considering building 60/40 portfolios.
“Sticky inflation may prompt interest rate hikes, which can negatively impact bond values,” he said.
Chung added that high inflation combined with slowing economic growth – or stagflation – could pose challenges for equities, especially when stock valuations are already high.
However, Aaron Chwee, OCBC’s head of wealth advisory, believes that the 60/40 portfolio remains a relevant investment strategy, especially for long-term investors seeking a balance between growth and risk mitigation.
“Amid all the recent market uncertainty, it is even more important for investors to diversify their portfolios with equities and bonds,” said Chwee.
He believes it is prudent to be diversified by always having exposure to both equities and bonds for the best combination of “defensiveness and growth potential”.
Alternative assets
Meanwhile, some analysts believe that consumers could better benefit from having a mixture of classical and alternative assets – hedge funds, gold and private assets.
These alternatives are designed to deliver returns that are uncorrelated with traditional public markets, said Hou.
“This model offers stronger performance while maintaining portfolio resilience… which is crucial in an era of rising geopolitical risks and market volatility,” he added.
StashAway’s chief investment officer, Stephanie Leung, also believes that gold will be a balancing asset alongside bonds in modern portfolios.
“Gold has historically performed well in periods of market stress and uncertainty, often moving independently of both equities and bonds, offering valuable diversification,” Leung said.
Investors should consider diversifying their portfolios beyond just bonds and equities and consider across geographies, sectors and bond durations, Leung said.
For instance, when US mega-cap tech stocks declined significantly this year, defensive sectors such as healthcare and consumer staples delivered positive returns of 6.5 and 5.2 per cent respectively.
UOB head of deposits and wealth management Winston Lim reinforced the need for adaptability and liquidity.
He said: “Rising or accelerated inflation because of trade tariffs could derail the outlook for rate cuts… which can impact both stocks and bonds negatively.”
He also highlighted the value of holding more cash during downturns.
“By raising cash, investors can maintain liquidity… (and) take advantage of lower asset prices once the market stabilises,” Lim said.
While market conditions continue to be volatile with the escalating trade tensions between the US and China, long-term investors should focus on fundamentals such as growth, inflation and liquidity as these factors ultimately drive markets beyond the short-term headlines, Leung said.
“Ultimately, investors should choose a portfolio with a risk level they are comfortable sticking with for the long term, and keep dollar-cost averaging into it through market ups and downs,” she added.
