Why just the traditional 60/40 investment portfolio won’t work in 2022


The first half of 2022 has been a whirlwind for investors and financial advisors amid high market volatility.

As they brace themselves for the second half of the year, a key way for them to succeed will be rebalancing, Omar Aguilar, CEO and CIO at Schwab Asset Management said at the CNBC Financial Advisor Summit.

Those adjustments to portfolios should be done with long-term strategic goals in mind, he said.

“Panic is not a strategy,” Aguilar said. “You have to think about the long-term investment objectives and plan strategic allocations and try to look for opportunities to rebalance to those.”

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A second crucial part to making rebalancing work is to stay diversified, he said.

“Most likely, the risk that you thought you had in your portfolio has now changed,” Aguilar said. “Rebalancing to the risk profile that fits you and your clients is a critical part of the next phase.”

Admittedly, that next phase may pose challenges, including a heightened recession risk, according to Sébastien Page, head of global multi-asset and CIO at T. Rowe Price.

One key reason for that is history is not on our side, he said.

Of the 13 rate hiking cycles that have happened since World War II, 10 of them have ended in a recession. Moreover, the Federal Reserve has never been able to reduce inflation by 4% or more without triggering a downturn.

Nevertheless, it’s best not to panic, Page said, echoing Aguilar’s advice.

“Stay invested, stay diversified,” Page said. “It’s very basic advice, but in this environment, it’s more relevant than it’s ever been.”

A tricky hunt for uncorrelated assets

Looking for opportunities for gains will likely push financial advisors to think differently about traditional 60% stocks/40% bonds portfolio constructions in the coming months.

The trick will be identifying assets that don’t follow the market’s general direction, which may lead to a correlation surprise during selloffs, Page said.

Of traditional 40% bond allocations, Page said he would have 12% of that in alternative investments, which may include liquid and illiquid alternatives, commodities and more.

“Generally speaking, alternatives deserve a fresh look, given that we’re in a higher interest rate volatility and higher inflation volatility regime,” Page said.

Just because an asset class is uncorrelated doesn’t necessarily mean that it will provide the so-called protection during periods of short-term volatility.

Omar Aguilar

CEO and CIO at Schwab Asset Management

T. Rowe Price is also overweight value stocks, he said.

It’s important to look beyond short-term volatility and identify why an asset class belongs in a portfolio, Aguilar said.

“Just because an asset class is uncorrelated doesn’t necessarily mean that it will provide the so-called protection during periods of short-term volatility,” Aguilar said.

While there have been suggestions that cryptocurrencies and digital assets may be inflation hedges, there is no direct link between inflation and the structure of those asset classes, Aguilar said.

Moreover, while some may be tempted to turn to cash as a safe haven, that often isn’t the best decision for the long-term, he said.

“Staying invested, staying diversified and staying disciplined tends to prove to be a better long-term strategy than trying to time when you have more cash and when you deploy cash,” Aguilar said.



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