Stock-Only Strategy Trumps 60/40 Mix for Long-Term Returns
The Study: Equities vs. Diversification
A recent study has revealed that long-term investors who focus solely on equities can expect significantly higher returns compared to those who diversify with fixed-income securities. This goes against the conventional wisdom that a 60% allocation to stocks and 40% allocation to bonds is the best way to maximize returns while minimizing risk. The researchers behind the study estimated that if Americans adopted an all-equity strategy, they could potentially realize trillions of dollars in welfare gains.
The Results: Equities Outperform Diversification
The study conducted simulations that modeled a 40-year investment period for a typical US household. It found that a portfolio with a 50% allocation to domestic stocks and a 50% allocation to international stocks would yield an average of $1.07 million by retirement. Focusing solely on domestic stocks would result in an average of $1.05 million. Meanwhile, the traditional 60/40 equity-bond mix only averaged $760,000, and a strategy focusing solely on bonds yielded only $280,000. The researchers concluded that bonds provided little value for the type of long-term investors they considered.
The Role of Bonds and Diversification
Although bonds provide some psychological relief for investors due to their perceived safety, the study found that the short-term downturns experienced by stocks did not outweigh their long-term gains. Furthermore, there was a correlation between the movement of stocks and bonds, diminishing the case for diversification. The study also emphasized the importance of geographic diversification, showing that spreading investments across domestic and international markets had better results than focusing solely on one market.
The Criticism: Performance Challenges and Alternative Approaches
As the performance of the 60/40 portfolio has faltered in recent years, it has faced increased criticism. Factors such as the Treasury market meltdown have contributed to the underperformance of both stocks and fixed-income securities. While some institutions like Vanguard anticipate that the traditional mix will continue to yield positive returns, others, like BlackRock, advocate for alternative approaches. This includes considering separate assets such as gold, private investments, and options. Analysts, like Goldman Sachs’ Christian Mueller-Glissmann, have also voiced support for exploring different investment avenues.
