#216: Revisiting 60/40 Portfolio’s

S2N Spotlight

This is addressed to me more than anyone else. We are all geniuses after the fact. Sorry, that is the way we were wired; it takes a huge amount of effort to overcome this bias. The question I pose here is can we see which is the superior investment return?

I am pretty sure 90%+ will be drawn to the S&P 500 benchmark portfolio that made a 11000% return versus the 5000% 60/40 portfolio (S&P 500 & US Treasury total returns). The greatest gift you can give to your long-term wealth is to think in risk-adjusted terms.

There are many definitions of risk, but for now we will stick with the gold standard, the Sharpe Ratio, which is a measure of the investment’s volatility. Based on this, the 60/40 portfolio is nearly 2x better an investment.

The chart below looks at the rolling correlation of the S&P 500 total return with the US Treasury Index total return, which is what produces the magic under the hood. Basically, they perform at different times and in different ways. Mix them together, and you have a recipe that even your bobba didn’t have back in the old country.

Of course the experts in the field are all debating whether 60/40 is dead due to bonds performing so badly over the last few years. I disagree that it is dead. However, I am all for a nip and tuck. As I alluded to yesterday with gold, the best you can do in my opinion is fiddle around the edges. So at times it might be more appropriate to be 70/30 or 50/50. I will leave that to you to decide or follow my lead as I delve deeper in the coming weeks or months.

The takeaway is not to declare the death of a diversification strategy because its headline numbers underperformed a benchmark. The point is to understand that your greatest gift to your financial future is to think in risk-adjusted terms.

S2N Observations

The pace of things to come under the Trump administration is going to be breathtaking. His first day in office didn’t disappoint with the announcement of the $500 billion Stargate AI Project. I wasn’t expecting that one.

I guess he has been taking lessons from his new buddy Zuckerberg with his company catchphrase, Move fast and break things. Watch this space.

Back to the S&P 500 and its long-in-the-tooth bull run. It has been a while since we had a drawdown that Thomas Lee and David Portnoy screamed by the dip. Just saying…..