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Time to Revisit Your 60/40 Portfolio Expected Return for 2018 and Beyond


You don’t have to be neck-deep in the financial field to know that the markets have been at all- time-high levels recently. Did you know that since the U.S. November 2016 election, there have been over 50 record-high market closes? As a result, your investment plan may not align with your goals or be working hard enough for your changing priorities. While a 60/40 portfolio may have worked in the past, it might be time to revisit your strategies to make sure they still make the most sense for you.


Vision For The Future

Knowing that we cannot rely on the markets to behave exactly as they have in the past, we may need to rethink the popular 60/40 portfolio philosophy. While a 60% equities and 40% bonds line up has historically delivered an annual return of just over 6%, that doesn’t mean it will continue to do so in the future.


With the recent performance of the equity market, which has broken record after record this year, and the bond market’s 30 year record of favorable returns and historically low yield, it’s tempting to think things will always be this good. But over the last couple of decades, a combination of factors have resulted in this scenario and it’s unlikely it will play out in the same way in the coming years. Whatever sequence of events appears next may not be as conducive to the typical joint asset classes of equities and bonds.


We know one thing about the markets: they are cyclical. What goes up must come down. If that’s the case, then we may see a declining equity and bond market and an increase in volatility.

The Typical 60/40 Portfolio

What does this mean for your portfolio? What do you do when equities and bonds are trading at a red hot level? Can you blindly rely on the traditional 60/40 model to deliver decent returns despite the current level? We are hesitant to believe that the benefits of this type of diversification will continue to pay off in the future.

Current Perspectives

Things could transpire in a myriad of different ways. If we witness a growth shock and an inflation pick-up, there is only room for downside, especially considering the current valuation of stocks and bonds. In a scenario of stable moderate growth and tamed inflation, we may end up with subpar returns compared to historical data. And the worst threat to a 60/40 portfolio is high and rising inflation. (1)


The main concern right now is the Central Bank’s lack of ammunition given growth or inflation shock. There is no room to ease monetary policy when the rates are at a historical low and the balance sheets are already inflated. The old days of using bonds to hedge the equity risk of your portfolio might be gone for a while. Moreover, the best bonds to cushion your portfolio might no longer be expensive sovereign bonds but corporate bonds instead. (2)

Potential Solutions

Are there any asset classes or strategies that can mitigate the risk and generate a return that is not dependent on the direction of the bonds and equities market and still be fairly priced? Here are some ideas:

  • Increase cash position
  • Shorten the duration of your bonds
  • Look for lower Beta stocks
  • Buy a put-option on a stock index (this is a more expensive option)
  • Sell short a market-capitalization weighted index

There are some interesting strategies that can be used, but if the worst-case scenario does not unfold, you need to consider the cost of carry of those low yield investment or interest expenses on margin accounts. Additionally, some of these strategies are not easy to execute for the average retail investor.


We are more inclined to suggest caution with the 60/40 strategy going forward. A better diversified fixed income portfolio may be a good strategy to mitigate the cost of carry of playing too safe with low yield sovereign bonds. A mix of sovereign, corporate, high yield, convertibles, and non-Canadian bonds may provide more protection against macroeconomic risks. We know central bank policies are converging in the same direction, but not at the same pace, and that may create opportunity on a relative basis. And we don’t know the impact of the new US fiscal policies on inflation and US GDP growth. In Canada the rate hiking cycle has been put on hold but we don’t know for how long given the potential benefit we can get coming from a surge in growth South of the border.

Take Action

As we close out 2017, it’s an ideal time to think about what we should realistically expect going forward and make the changes necessary to set yourself up for a successful new year. Specifically, you should examine your 60% equities with prudence. The favourable equity return of 2017 has been supported with plenty of optimism and good earning fundamentals, but the room for error is thin. It’s always risky to become complacent when valuation reaches its peak among the highest historical P/E ratio. At this point in the equity bull market cycle, it would be wise to start reducing your exposure to stocks while simultaneously increasing your cash level. In your equity portfolio, begin trimming your positions in your “priced for perfection” stocks as well as your market-capitalization weighted ETF stock indexes. Moreover, anyone invested in the S&P 500 index in 2017 cannot deny that there has been a lack of ups and downs and daily, weekly, or monthly volatility all year long. This constant increase makes us nervous for an unexpected shock that could quickly knock down our current bull market.


If you’ve never thought of diversifying your 60/40 portfolio away from stocks and bonds, it might be a good time to explore alternative investment strategies to lower your portfolio risk and hedge a potential equity market downturn. Betting solely on your core-bond investment might not be the shock absorber that it was in the past. At Montag Private Wealth, we provide comprehensive asset class portfolio construction for our clients. We use a customized asset allocation process based on the individual needs, goals, and circumstances of our clients. If you are ready to reexamine your portfolio and make some changes for 2018, book an appointment now!


About Carl 

Carl Martel is the president and portfolio manager of Montag Private Wealth. Along with more than 15 years of capital market experience and 10 years of experience in real estate hard assets, he is a Chartered Investment Manager® and holds a Certificate in Derivatives Market Strategies from CSI Global Education, a Masters of Science from Laval University, and an MBA from l’Université du Québec à Montréal. A focused and pragmatic, results-oriented investment professional and entrepreneur, he specializes in serving the unique financial needs of high net-worth individuals and families, foundations and endowment funds, and business owners. To learn more, visit or connect with Carl on LinkedIn.