Skip to main content

The 60-per-cent fixed income, 40-per-cent equity portfolio has been an important benchmark for balanced funds and overall asset allocation for decades.

Merrill Lynch analyst Jared Woodard, however, believes the 60/40 portfolio is now far less relevant because of the rising risks in bond markets.

In The End of 60/40, Mr. Woodard cites three reasons that bonds may no longer provide the portfolio stability and consistency they once did.

Story continues below advertisement

The first reason is that bond portfolios have not been providing diversification. He writes, “The core premise of every 60/40 portfolio is that bonds can hedge against risks to growth and equities can hedge against inflation; their returns are negatively correlated."

The problem in recent years is that periods of major market weakness have seen both bonds and equities fall.

In the U.S., longer duration government bonds have generated terrible risk-adjusted returns over the past three years - lower than junk bonds and emerging market equities. This means that investors who bought Treasury bonds for steady returns and lower portfolio volatility have seen volatility actually increase.

The data is U.S. based, but the performance of U.S. and Canadian long-term bonds has been virtually identical, as this chart posted to social media underscores.

Mr. Woodard’s final warning about bonds concerns overcrowding. He notes that globally, the fund manager allocation to U.S. Treasury debt is close to a 20 year high. So far in 2019, investors worldwide have sold US$208-billion from equity funds and bought $339-billion worth of bond funds.

With government bonds so popular, the analyst is concerned that “Crowded positioning means that natural swings in bond prices may be exacerbated as active investors rebalance their holdings.”

To the extent that Canadian investors have made the same switch to fixed income – and the 38 per cent increase in the market capitalization of the iShares Core Canadian Universe Bond Index ETF suggests fixed income has been popular domestically - these risks are also present here.

Story continues below advertisement

Merrill Lynch’s remedy for the rising risks in bonds is to increase holdings of dividend-paying stocks in beaten down sectors like financials, industrials, materials.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Algonquin Power & Utilities Corp. The Oakville, Ont.-based renewable energy producer and distributor’s big new offering of shares raises a couple of issues for investors who have bet on its growth-oriented approach. David Berman takes a look at the risk/reward proposition.

iA Financial Corporation Inc. The insurance and financial services company’s stock closed at a record high on Tuesday. Management is committed to delivering annual earnings per share growth of 10 per cent or higher as well as steady dividend growth. It also possesses a potential near-term catalyst, according to Jennifer Dowty.

Story continues below advertisement

Bausch Health Cos. Inc. U.S. short-seller Andrew Left who helped take down Valeant Pharmaceuticals International Inc. has turned bullish on the company that emerged from the debacle, reports Tim Shufelt.

The Rundown

Five costs that are killing your investment returns, and what to do about them

A fee war is driving online brokerage commissions to zero in the United States, a spectacle that is going to divert investor attention from more pressing matters. Rob Carrick examines other costs that do more damage to the portfolios of do-it-yourself investors.

Is the market’s next move up or down? A guide to finding answers in the Rorschach economy

Welcome to the Rorschach Economy. Like the famous ink-blot test, today’s market is an ambiguous mass of squiggles that people can interpret in wildly different ways. Pessimists can point to fading factory activity, negative bond yields and rising trade tensions as evidence that calamity lies ahead. Optimists, meanwhile, can gesture at 50-year lows in Canadian and U.S. unemployment as proof that the world is unfolding as it should, writes Ian McGugan.

Story continues below advertisement

A frighteningly good strategy for income investors: Mash momentum into the mix

After being stuffed with turkey, the country is ready for the most spooktacular time of year. While chocolates and candy are treats at any age, investors can nibble on my homage to the Monster Mash, which brings together dividend investing and momentum investing. Norman Rothery looks at the Dividend Monster portfolio.

Bill Gross says to stick to dividend stocks amid low bond yields, but risks still remain

The one-time bond-market king is back in the news, advising investors to spurn bonds at today’s dismally low yields and load up on “high-yielding, secure-dividend” stocks instead. It’s a tempting theory. But people should be cautious about betting too much on Mr. Gross’s advice, explains Ian McGugan.

Others (for subscribers)

Wednesday’s analyst upgrades and downgrades

Story continues below advertisement

Tuesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: Billionaire businessman is a buyer of these two penny stocks

Tuesday’s Insider Report: CFO invests $1-million in this TSX-listed stock

Others (for everyone)

A safer way to generate growth in a TFSA

Industrial earnings take centre stage in third quarter with trade, economy in focus

Story continues below advertisement

Globe Advisor

A safer way to generate growth in a TFSA

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.

Ask Globe Investor

Question: My discount brokerage account shows the “average cost” of all stocks that I own. Is this the same as the adjusted cost base (ACB) for reporting purposes when I sell in a non-registered account?

Answer: In a perfect world, the average cost figure provided by your broker would always be the same as the ACB for tax purposes. However, I’ve seen cases where the broker’s average cost or “book value” is not correct. (I wrote about an especially egregious example here. The numbers can be off, for example, if the broker fails to include distributions of return of capital (which are deducted from the adjusted cost base) or ignores reinvested fund distributions (which are added to the cost base). To cover themselves, brokers typically post a disclaimer on their website saying it is the client’s responsibility to calculate the ACB. So, if you are planning to sell a security and need to calculate your capital gain or loss, you should double-check the broker’s average cost figure to make sure it is accurate.

-- John Heinzl

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

David Berman shares insight on what the federal election will mean for equity investors.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Click here share your view of our newsletter and give us your suggestions.

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies