In recent years, traditional portfolio constructions — most notably the classic 60/40 equity/bond allocation — have served investors well. They are simple, have been effective over the long term, and have historically offered diversification.
Is the diversification of a 60/40 portfolio just on a break, or has it ‘left the building’?
We have previously examined the equity/bond allocation and asked, ‘Is 40/30/30 the new 60/40?’ Well, yes, we think it is. Our work shows a long-term correlation between equities and fixed income that is frighteningly close to 1.0.[1] This increased correlation fundamentally alters the effectiveness of traditional portfolio construction.
