Over the past century, it has become common knowledge that stocks and bonds are inversely correlated.
When the stock market takes a tumble, bonds tend to rise, and the opposite is true when the stock market rallies and bond prices decline.
For decades this knowledge has pervaded portfolio management strategies. This straightforward approach of moving between stocks and bonds has proven useful for all living memory.
But times change. The relationship between stocks and bonds has slowly broken down, and bond yields have plummeted into record low territory in recent years.
Nevertheless, there is a fierce debate regarding one of the most popular retirement investment strategies.
How The 60/40 Portfolio Works And Why It Became The Standard
This strategy works by investing 60% of a retirement portfolio into stocks and 40% into bonds, which are largely assumed to offer investors a “risk-free return.” Using this method, investors could accumulate a slow but steady rate of return.
The 60/40 rule worked wonders for generations past.
This strategy was especially true in the 1980s when bond yields topped 15% in 1981. With such high yields, investors close to retirement could assure two or three decades worth of stable returns.
10 Year Treasury Bond Yields
As the stock market soared throughout the early 1980s, investors enjoyed the best of both worlds by using the 60/40 strategy. So, what changed?
Economic shifts have broken down traditional investment strategies
While stocks have marched to record highs, bond yields have found unprecedented record lows. These depressed prices have grave implications for the long-term profitability of a 60/40 portfolio.
With yields barely beating inflation, leaving 40% of a portfolio in bonds means that almost half of the portfolio is barely performing.
The math is straightforwardly unsettling:
$100,000 invested in bonds yielding 5% results in $5,000 per year for retirement. Compare that to a 1% rate yielding $1,000 annually, and the underperformance becomes apparent.
So, investors now face the difficult challenge of recalibrating their portfolios in the face of age-old wisdom breaking down.
Changing Times Mean Different Portfolio Allocations
The times now demand a change – but where should investors look?
For many portfolio managers, the solution comes in the form of alternative assets.
Alternative instruments such as futures, precious metals, and real estate now play an important role in the emerging culture of portfolio management.
While these investment vehicles intrinsically carry more risk than their sovereign bond counterparts, the returns associated with these tools are quite comfortable by comparison.
With global equity markets presenting record returns, wealth managers face the temptation to shift a portion of the previous conservative bond allocation into more speculative assets. Reasons vary, but those decisions largely aim to make up for bonds’ lackluster performance in recent years.
Real Assets Are Undervalued Compared To Financial Assets
This would be a mistake. As we’ve mentioned before, equity markets are being propped up by massive QE policies, and retail investors are participating in the market at a record rate. Both of these factors indicate that the sky-high valuations we observe in the stock market today don’t represent real value.
To make matters worse, even the traditional alternative asset classes present serious issues.
At first glance, gold might seem like a good alternative to bond and equity markets. Precious metals have certainly proven an effective hedge in the past, and their price movements over the last year are highly encouraging.
But even gold is cyclical, and right now it looks highly overbought. Seeking Alpha notes that gold is extremely overbought, citing FOMO buying and a general shift towards inflation hedging.
Conventional real estate is another space that investors look towards for diversification and non-correlated returns. Housing prices have risen substantially around the globe thanks to COVID-19, rising commodity prices, and an increasing number of people working from home, among other factors. But with prices so high already, now may not be the best time to get into the market.
If you’re looking to shake up the traditional 60/40 split, real assets are the way to go. But the price point is important. Often, large capital requirements prevent would-be investors from allocating to real estate – or at least, conventional real estate.
Thankfully, there is one alternative asset class that offers investors a golden opportunity.
Out With The Old, In With The New
Commodities are shockingly undervalued, with major global banks now calling for a new commodity supercycle.
Goldman Sachs is bullish on the commodity space. The investment bank’s commodities head, Jeffrey Currie, told S&P Global that there would be a “long-lasting bull market” for most commodities.
The trillions of dollars in profit from the record equity market boom are now winding their way through the pipes of the global financial system. Where do you expect the money to go?
Our bet makes sense from a historical and current perspective: We’ll see a wave of reallocation towards the heart of the economy, to physical goods.
The prices for lumber, oil, and metals have quickly bounced back from their early 2020 lows, highlighting the rapid turnaround in sentiment towards commodities.
Particularly, agricultural commodities are well-positioned to enjoy the full upside of the coming commodity supercycle.
Climate change also presents additional long-term challenges to global agriculture at an already crucial juncture in time. The adage “money doesn’t grow on trees” reflects a reality we all know subconsciously – growing food takes time.
Productive agricultural real estate is already enjoying the rapid appreciation as other real estate and commodities. There’s never been a better time to explore farmland as an addition to your portfolio.
As the Commodities Boom continues to gather steam on the back of China’s exploding demand for everything from copper to corn, we see rising ag real estate prices across the US.
For those looking to shake up their retirement portfolios by diversifying into alternative assets, there’s no better place to look than farmland real estate. Across the world, secure, high-yielding opportunities are popping up that promise investors access to non-correlated returns, true inflation hedging, and protection from the volatility of publicly traded markets.
Is the 60/40 rule completely dead?
The answer depends on the portfolio management strategy in question. Some major financial institutions are phasing out 60/40 completely. Other firms are sticking to their guns in hopes of higher bond yields in the future.
Regardless, the average retail investor – especially those looking to build a strong retirement portfolio – can’t deny that sovereign bonds aren’t going to get them where they need to be, and that stocks may be much too overvalued. The search for yield is driving investors towards alternative assets, from gold to real estate to futures and more.
But in spite of this shift, there’s one asset class that’s still significantly overlooked – farmland. Click here to learn more about how you can access real assets in farmland today.