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Investors with lower levels of net worth can try to improve returns by increasing exposure to stocks or by investing in hard assets such as bullion or precious metals mining stocks, some suggest.

William_Potter/iStockPhoto / Getty Images

While the traditional portfolio asset mix of 60 per cent in stocks and 40 per cent in lower-risk bonds has served financial advisors and investors well for many years, some in the investment industry are now questioning its future.

Wall Street firms such as BofA Securities Inc., Morgan Stanley and JPMorgan Chase & Co. have warned lately that this strategy is broken or ailing in an era of near-zero interest rates and will need tweaking to generate sufficient yield.

Alternative investments can potentially make up for shortfalls in this balanced portfolio for some investors, but others may want to consider other options.

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“Bonds are dead,” says David MacNicol, president and portfolio manager with MacNicol & Associates Asset Management Inc. “Mainstream government bonds and high-quality corporate bonds do not show enough return right now for investors to retire on and live off of.”

The 60-40 portfolio helped erase or cushion steep drawdowns in the Canadian stock market from 1982 to 2009 because falling interest rates helped bond returns, says Mr. MacNicol. “After 2009, we say it stopped working.”

The Bank of Canada cut interest rates dramatically in 2009 “to get us out of the credit crisis … but that can’t happen anymore,” he says. The central bank recently said that negative rates are off the table.

Since 2009, Mr. MacNicol says his firm become more focused on diversifying portfolios with alternative investments. It’s a strategy pioneered by Yale University’s endowment fund and has been adopted by many pension funds.

Instead of a 60-40 strategy, he says a sample portfolio now might include 55 per cent in what he calls “core holdings,” which is mainly stocks, such as blue-chip dividend payers, and precious metals holdings that include miners and bullion.

“We believe there has to be a hard asset, such as gold, to offset these gigantic debt and deficits that have been created to stabilize the economy and the stock market” in response to the COVID-19 pandemic, Mr. MacNicol says.

Another 25 per cent would go in alternative assets, including private real estate, hedge funds and private equity, which would also include investing in bitcoin. And 20 per cent, now in short-term corporate bonds, will soon go into a new alternative debt fund that “will be a bond replacement,” he says.

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However, the alternative asset space can be a minefield in which “some promoters charging high fees are making more money than investors,” MacNicol warns.

“We choose who we think are the safer managers with pedigrees,” he says, adding that his firm has access to investments available to institutional investors. “We will have an alternative space using 30 managers. It takes out systematic risk.”

Investors with lower levels of net worth can try to improve returns by increasing exposure to stocks, even though that increases risk, or by investing in hard assets such as bullion or precious metals mining stocks, but timing is critical, he says. Mr. MacNicol has been bullish on gold prices, which have rallied strongly this year. Gold futures contracts surpassed their record high on Monday to trade at the US$1,930-level.

Arthur Salzer, chief executive officer and chief investment officer at Northland Wealth Management Inc., agrees the 60-40 portfolio faces headwinds because of low interest rates and stock markets becoming expensive in the developed world.

“If you have a return target of 7 per cent, which many pensions and charities do, that target is probably unrealistic,” says Mr. Salzer, who oversees a multi-family office. “You are probably looking at a 3- to 4-per-cent return, maximum.”

That’s why his firm made the transition to what he calls a “new 60-40 portfolio,” with 60 per cent in publicly-traded securities, which could be stocks and bonds, and 40 per cent in non-public, alternative investments, including private equity, private debt, private real estate and hedge funds.

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Mr. Salzer also says that the alternative-asset space comes with risks unless investors can deal with top-quartile managers, but they typically require hefty minimum investments. “We can write $10- to $30-million cheques [as an institutional investor], but we may break that up into individual investments.”

Alternative investments sold by brokerages or exempt-market dealers are often expensive and have fees that can be 50 to 100 per cent higher than offerings sold to institutional investors and will eat away at returns over time, he says.

These investments are also not for everyone. They require proper due diligence because of their complexity, Mr. Salzer says. For example, some private debt and mortgage funds have halted redemptions during the current economic downturn. Their investors can’t get back their money right now, but it’s preferable to selling investments at the wrong time, he suggests.

For investors with a few hundred thousand dollars in investible assets, it’s better to stick with a traditional 60-40 portfolio and invest in high-quality dividend stocks for the equities portion, he says.

In stock market downturns, bonds can also be sold to rebalance a portfolio and then invested in stocks at cheaper prices, he says. “If you buy [securities] when they’re down, that helps the average investor.”

Smaller investors might be able to improve returns by owning a gold-bullion mutual fund and having a small position in a publicly listed bitcoin fund, although this digital commodity is highly volatile, he says. The price of bitcoin surged to more than US$10,000 on Monday for the first time since June.

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Dan Hallett, vice-president and principal at Highview Financial Group, acknowledges that the future returns of a traditional 60-40 portfolio “will be lower than the past … but I wouldn’t say it is dead.”

Bonds have role in providing yield even though it won’t be high, says Mr. Hallett, who is responsible for manager research and portfolio construction. “We have exposure to federal, provincial and corporate bonds – that is our bond market.”

The 60-40 portfolio still makes sense because “it is problematic for the vast majority of investors to get into alternatives,” he says.

Many Canadian hedge funds packaged for retail investors have performed poorly, he says. “It’s not to say that there’s nothing good in that bucket, but over the last 25 years most of them have just failed or blown up,” Mr. Hallett says.

“We don’t use hedge funds … due to factors, such as high costs, the leverage, at times the complexities and less than ideal transparency,” he says. “Private real estate, private lending and private equity are alternatives that we will look at.”

Smaller investors, he says, might consider a 75-per-cent stock and 25 per-cent bond strategy that Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School and author of the investing classic Stocks for the Long Run, advocates.

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But Mr. Hallett says he’s not a fan of owning gold bullion and bitcoin.

“As far as I can tell, they don’t have their own fundamental characteristics that would allow you to estimate the rate of return with reasonable accuracy.”

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