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While bonds have recovered from last year’s rout, one portfolio manager believes the reprieve will be short-lived.William_Potter/iStockPhoto / Getty Images

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The drubbing in both stocks and bonds last year has rekindled the debate over the merits of the balanced 60-40 stock-and-bond portfolio. While some forecast the slow death of the traditional asset mix, pointing out it’s not diversified enough, others argue one bad year shouldn’t upend the longstanding investing rule of thumb, as long as it’s used in the right circumstances.

Nobel laureate Harry Markowitz developed the 60-40 bond portfolio in 1952 as a strategy for investors to get returns from the higher stock side of the portfolio while managing risk through the lower proportion of bonds.

It’s a simple way to achieve diversification, but it isn’t suitable for many investors, says Mark Yamada, president and chief executive officer of Pur Investing Inc. in Toronto.

He argues the 60-40 portfolio is largely intended for wealthier investors looking to preserve and grow capital.

“The 60-40 portfolio is really a solution to a problem that most of us don’t have,” Mr. Yamada says, noting that many investors are looking to boost returns to buy a home, send their kids to university or build a nest egg they can live off of in retirement.

These goals require a specific level of return, depending on the goals, and Mr. Yamada says investors may need to increase risk with more equities if they’re behind a target and then reduce risk with more fixed income when the goal gets closer.

“What people should be doing – or advisors should be doing for them – is monitoring all of those goals and seeing whether they’re ahead or behind and adjust as needed,” he says.

Bonds ‘reprieve will be short-lived’

David LePoidevin, senior portfolio manager and senior investment advisor with the LePoidevin Group at Canaccord Genuity Wealth Management in Vancouver, believes the 60-40 balanced fund is on its way out, forecasting a longer-term slump in bonds.

“We’re heading into a new era,” Mr. LePoidevin says. “I’m not way out there when I say balanced funds will not work and will probably not exist [in a few years]. We’ll call them something else or roll them into something else.”

And while bonds have recovered from last year’s rout, Mr. LePoidevin believes the reprieve will be short-lived.

“We’re going to resume the bear market in bonds at some point. The only way you can have rates really fall from here is the government buying them, and the government’s doing the opposite,” he says.

Mr. LePoidevin says investors looking for bond-like safety should buy guaranteed investment certificates at current rates of about 4 to 5 per cent, and hold “good dividend-paying stocks” with some global diversification.

His team is investing 30 to 40 per cent of its portfolios in preferred shares but says the strategy is more suited to active investors and advisors.

“That’s where the opportunity is now,” he says.

However, David Rosenberg, founder and president of Rosenberg Research, says his work shows bond exposure provides “superior risk-adjusted returns over time,” and 2022 was an anomaly. In fact, he says a 50-50 mix of equities and Treasuries may even be better.

“To suggest abandoning 60-40 [or 50-50] is to say diversification is out of style, but diversification never really goes out of style,” he wrote recently. “It remains a prudent risk management tool, in the past, present, and future, notwithstanding the reality that overall expected returns are far lower today than they have been historically.”

‘Don’t mind going back’ to 60-40

Darren Coleman, senior portfolio manager, private client group, with Coleman Wealth at Raymond James Ltd. in Toronto, says the 60-40 portfolio was “on life support” for years because stocks were much more attractive. However, he now sees a “rebirth” in the traditional 60-40 mix for investors looking for a better risk-reward mix.

“If they want that allocation, now they can move toward it because rising rates have given you an opportunity to get some yield,” at least in the short term, Mr. Coleman says.

“A lot of people will start saying, ‘On a risk-adjusted basis, I don’t mind going back toward that 60-40 target.’ So, they may not do it in one shot but start to drift back toward that.”

Mr. Coleman is taking another look at a 60-40 or 70-30 mix of stocks and bonds for his clients, particularly those approaching retirement and looking to preserve their capital.

“To us, everything begins with what their plan calls for,” he says. “Then, we look at their risk capacity and risk tolerance.”

There are also various fixed-income types with different maturities and risk levels. “A Government of Canada bond, for example, is very different than a BCE bond,” Mr. Coleman says.

“It’s really about having the right mix in the soup to ensure an investor eats well,” he says. “People shouldn’t be too hung up on if it’s 60-40 or not. That’s a good guideline, but there’s no real reason for it except historical comfort.”

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