Does the 60-40 portfolio still work? Part 2/2

In part 1 of this wire, I explored the recent history of the long-lauded 60-40 portfolio, where 60% is at-risk, invested in stocks, and 40% is defensive, invested in Government bonds. Not to deliberately make the whole thing massively US-centric, I assumed the 60% was an investable version of the S&P 500, and I assumed the 40% was an investable version of the 10-year US Treasury bond.

Here’s the link to Part 1: Does the 60-40 portfolio still work? Part 1/2 - Sebastian Ferrando | Livewire

In reviewing that history, and remembering that the reason you might choose the 60-40 set-up is that you’re looking for capital protection whenever markets roll over and the buffer of income when they don’t, we looked at the last 5 times you wanted or needed that protection.

That is:

• The China meltdown market of 2018,
• The COVID market of February and March 2020,
• The war in Ukraine market of 2022,
• The "Liberation Day" market of April 2025, and
• The war in Iran market YTD 2026.

Further, I’ve added the financial crisis of 2007 to 2009 because it was such a seismic event, because it has framed so much of today’s market structure, and because there’s a good chance that the downturn of 2007-2009 was the first time many people reading this got a large drawdown that they were meaningfully involved in.

Did sacrificing long term growth by being substantially exposed to bonds give you the protection you banked on in the moments you needed that protection the most? Using those investable options of both the S&P 500 and the 10-year US Treasury bond as proxies, it turns out that in none of the aforementioned events did the 40% buffer protect you from losing money – not one single time. In fact, in 2 of the last 3 drawdowns of stocks, the bonds piece also fell.

Furthermore, the investable vehicle for US 10-year Treasury bonds is down almost 2% per year for the last 5 years.

This is the data that has market participants asking the question - - does 60-40 still work? In part 2 of this wire, I’ll explore a different option that will provide the ability to get protected when markets turn down, to mute volatility when markets get turbulent, and to deliver income across cycles.

The big thing to note is that the reason the 60-40 became lore at all, that reason remains valid. That's because far too often, private client investors get on at the top, or get off at the bottom, or get on too late. Or sometimes do not get on at all.

The idea that anyone, literally anyone on the planet, has any idea when markets are topping or bottoming is just rubbish. If someone tells you they have even the remotest insight into this concept, walk out. They are either lying, deluded, or likely both. Your best long-term play is to stay invested.

It’s the execution of the 60-40 concept that is in question, not the broad concept. It’s the introduction of non-correlated ideas, of multiple geographies, of different instruments, with different goals. It's that you want your portfolio to be a collection of good ideas that go up over time, just not necessarily at the same time.

One of the many ways to achieve this is in private markets. The rise of private markets investing has been marked over the last decade, even two. From a fringe part of global capital markets in the late 20th century, often centred in private equity, private markets investing has turned into a beast with the rise of all sorts of private markets investing options, including the media anti-darling of the moment, private credit. But it’s not just that – there’s infrastructure, there’s energy, there’s insurance-linked products, there’s litigation financing. Then stepping out maybe a little further on the risk spectrum, there’s also commodities, there’s real estate - - I could go on-and-on.

Some of the largest Wall Street firms are in private markets - Blackstone, KKR, Apollo, Carlysle, Brookfield. The list is long and formidable.

Just in case it isn’t obvious, this is the alternate option – going into private markets. These markets were the preserve of the ultra-wealthy not very long ago, but as capital markets evolve, they have democratised access to this previously institutional class of investments.

Pausing for one second to clarify that this is not personal financial advice and that you should consult a professional to walk through your particular personal situation, it's important to know that there are drawbacks in private markets to consider:

1. They are more opaque, almost always, than public markets. Whether you’re buying individual stocks, or using ETFs, there’s disclosure clarity in public markets that private markets don’t have. There is a transparency of holdings, like knowing the top positions in an actively managed ETF. You’ll unlikely get anywhere as clear a look-through in private equity or private credit, for example.
2. Concentration risks. Because you don’t get to see all of the holdings details, there may be concentration risks in some of these vehicles that you mightn’t like, or that mightn’t suit you. For example, if you have a lot of real estate in your balance sheet, and you decide to invest in the Australian private credit space, it’s very likely that you just doubled-up your real estate exposure. A (very??) large slice of the Australian private credit arena is exposed to, you guessed it, real estate.
3. These vehicles are illiquid. In spite of the discovery of a new term lately – semi-liquid – as we are finding out right now in the private credit space, there’s not really any such thing. Investors should understand that words mean something, and liquid means you can quickly turn an investment into cash. Go ask Blue Owl investors in the US whether or not their Blue Owl holdings are “semi-liquid”. They’re not, and they never were. When in doubt, it’s best to consider a lot of private markets options, and maybe all of them, as illiquid.
4. Valuation blind spots. As much as many people think that the constant milli-second re-pricing in global stock markets is a problem, I couldn’t disagree more – that’s a feature, not a bug. Everything that investors know is reflected in that security’s price in that millisecond. You will get no such pricing clarity in private markets. In fact, lots of private markets valuations are subjective so understanding how that process works is important. But you’ll need to go find it, you won’t have it handed to you like stock market valuations, and certainly not anywhere near as regularly.

Another thing to clarify is that I am absolutely not suggesting that your entire 40% bucket of the old 60-40 be filled with defensive private markets investments. This potential alternative will need to be tailored to your personal situation and even then, it’s likely that you’ll continue to need traditional fixed income because of liquidity, transparency, predictability, and diversification. Remember, that’s the piece of your portfolio that’s designed to protect you, so as much as it might be justifiable for private credit funds to throw up the gates, it’s not a quality you want present throughout the 40%.

Bottom line – the concept of 60-40 still holds a lot of water, but the structure around it has changed, so your execution of it may also have to change.

Recalling that this piece is not personal financial advice, make sure you’re working with an adviser that not only deeply understands private markets, but one who can also execute with the best tools in the marketplace, within the context of your personal situation. Modern day private client investment portfolios need a combination of cash, fixed income, private credit, defensive alternatives, income equities, global equities, growth alternatives, and opportunistic strategies.

Not everything will work perfectly, or as you expect - it never does. In spite of that, make sure your portfolio has some combination of those ideas.

Good luck out there.