The 60/40 Portfolio Isn't Dead. But Is It Enough?

Some alternatives offer solid returns that may outperform equities over time. But these high potential returns may come with a high correlation to equities so they don’t offer a high level of diversification. A better option might be to look for alternatives that offer decent returns with a lower correlation to equities, bonds or both.

Durable and consistent returns: Like any investment strategy, an alternative investment should have a consistent and durable record of returns. It’s important to have a good understanding of how this investment is going to perform in different market and economic environments. The fewer surprises the better.

Defensive: Many alternatives act as a defensive component of a client’s portfolio. This is often through relatively low correlation to stocks, bonds or both. The timing of returns from the alternative will often differ from that of stocks or bonds, thus providing a more consistent level of overall portfolio returns.

Alternative ETFs and Mutual Funds

Investing in alternatives has become easier for advisors whose clients are not accredited investors or qualified purchasers. The rise of mutual funds and exchange-traded funds that invest in alternative assets and strategies has made investing in alternatives accessible for more average investors.

An example is the introduction of spot bitcoin ETFs in early 2024. These ETFs offer a convenient, low-cost and liquid way to invest in bitcoin.

Mutual funds and ETFs investing in alternatives are known as liquid alts. On the one hand, the availability of liquid alts allows advisors and their clients greater access to many more alternative investments.

On the other hand, advisors need to look at how these liquid alts might differ from investing into these alternatives in a more direct way, including whether the added liquidity diminishes the performance or diversification value of the underlying alternative. Liquid alt funds often have higher expense ratios compared with other types of mutual funds and ETFs.

Wither the 60/40 Portfolio?

This is in no way to suggest that the 60/40 or other iterations of a balanced portfolio focused on stocks and bonds is dead. Rather, the use of alternatives serves to enhance the allocation in most cases.

The addition of alternatives may act as a part of the stock or bond allocation. Or perhaps the 60/40 might become a 55/35/10 allocation or something similar. Advisors who want to harvest the potential upside of a balanced portfolio while mitigating the downside will often use alternatives to enhance the portfolio and to give their clients a better shot at achieving the original objectives of the balanced portfolio.