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.
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.
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
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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
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