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Debate Over 60/40 Allocation Continues …

edited June 2023 in Other Investing
Investors keen to keep an eye on their own investment portfolio can still rely on the basic wisdom of a 60/40 weighting to equities and bonds despite the recent souring of sentiment towards it, industry participants say. BlackRock warned at the end of April that, despite the recent rebound for this classic investment approach, investors should now buy a wider range of assets, but its biggest rival provider of exchange traded funds insists the traditional portfolio still has good long-term prospects.

“Research from Vanguard dating back to 1977 shows last year was a historical anomaly for the 60/40 portfolio in that it was the only year in which both equities and bonds sank in value — delivering double-digit losses.In every other year, either both were in positive territory or gains in one offset losses in another. Roger Aliaga-Diaz, Vanguard’s chief economist for the Americas and head of portfolio construction, maintains that knee-jerk responses to market upsets are unwise. He points out that over the 10 years to the end of December a classic 60/40 portfolio would have delivered an annualised return of 6 per cent. Over the past four years that figure would still have been 5.9 per cent and the Vanguard Capital Markets Model projection for the next 10 years as of the end of December was for returns of 6.1 per cent.”


Above excerpted from The Financial Times - June 17, 2023

https://www-ft-com.ezp.lib.cam.ac.uk/content/8b6221f8-daa4-4cd9-8c76-58c8e0f7fff0
(May require subscription to access)


I checked the recent performance of three funds sometimes viewed as “safer” alternatives to a traditional 60/40 mix. (I’ve owned each of these in the past.) Returns going back to 3 years aren’t encouraging:

TMSRX 3-year annualized +1.22% / YTD +1.49%

BAMBX 3-year annualized +0.42% / YTD -0.31%

CCOR 3-year annualized +0.91% / YTD -10.51%

(Numbers from M*)

Three years could be viewed as ”short-term”, but we live in a world where many view it as ”longer-term” - for better or worse. Did not check for 60/40 balanced funds. Would not expect near-term results to be much better. Balanced funds pretty much got “clocked” in 2022. More questions than answers here for conservative investors designing a portfolio with both growth potential and a risk profile they can cope with.
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Comments

  • edited June 2023
    There are now several favorable comments on 60-40 including in this week's Barron's (Joyce Chang, JPM). 2022 was a horrible year for bonds and hybrids (also for stocks, but nothing historic). It should be better/good going forward.
  • edited June 2023

    There are now several favorable comments on 60-40 including in this week's Barron's (Joyce Chang, JPM). 2022 was a horrible year for bonds and hybrids (also for stocks, but nothing historic). It should be better/good going forward.

    Yes thanks Yogi. And @LewisBraham has a good article in the same issue about “Funds that Weather the Storm” - ie: equity funds that have managed to produce strong results and hold up well during turbulent times in the markets. I’ve often felt Barron’s pays for its subscription price many times over for investors who heed some of its recommendations.

  • The 3 noted with 1 year chart.

    Side note: Although a totally funky 1 year for a broad U.S. bond fund, a current real return for a total U.S. equity index and and total U.S. bond fund, each with about 3,000 + holdings; and these two within a 529 account at a 50/50 have a combined total 1 year return of 11.1%. So, not getting the big equity bump from the averaging down of the bond fund, which has a 1 year return of +.36%; but bonds have tempered equity draw downs since 2006. I expect the bond portion to perform better going forward. For 15 years, this 50/50 has provided a decent tax sheltered return.
  • In all-weather fund lists, I like to see some familiar names of funds that have been around for several market cycles. The screen of up 2022 & 2023YTD found several unfamiliar funds.
  • Some follow on comments...
    *Nice article in Barron's by Lewis B..I'm invested in PVCMX and have recently invested in MRFOX...also noted that MAFIX, managed funds are in the article...BLNDX similar to MAFIX who knows maybe there is some magic in blending futures with Stocks?
    *Would be interesting to see number of funds who beat a 50/50 stock/bond index combo the past two years? I'm going to check if TSUMX has (I am invested in it)
    * I loaded Tbil onto the chart that Catch 22 noted...lot smoother ride without the ups/downs, no returns...makes you wonder if these experts can't figure it out did the others in LB's article just get lucky or skill involved?
    * Such a dichotomy going on right now...Biden spouting how economy is great, but tax receipts way down even though he increased corp tax, seat of the pants view, folks traveling bigly, airports full, restaurants are full, some companies still hiring, some letting folks go, maybe rolling recession, car dealers still charging list plus for new cars...strange, no? Makes you think the markets could go up another 20% and just as easy go down 20% plus...
  • Personally, I’m very optimistic about balanced funds right now because this is the first time in years that bonds are paying healthy yields. Even with the market crash in 2022, my primary balanced fund (FBALX) has decent three and five year returns.
  • Roy
    edited June 2023
    Though not a traditional 60/40 fund, returns for PRWCX are:

    YTD 10.49, 1 YR 16.16, 3 YR 10.32, 5 YR 10.56, 10 YR 10.79

    Returns for VBINX, a traditional 60/40 index fund are:

    YTD 9.81, 1 YR 12.70, 3 YR 6.12, 5 YR 6.84, 10 YR 7.77

    Compared to SP 500 fund, VFINX:

    YTD 15.71, 1 YR 22.17, 3 YR 13.80, 5 YR 11.45, 10 YR 12.46

    SD for PRWCX is 13.01 vs VBINX 12.58 vs VFINX 17.91

    With PRWCX you get just a bit south of 90% of the SP 500 return for 10 years with less volatility. For 5 years you get 92% of the SP 500 return. The people who constantly claim 60/40 is dead and useless don't invest in a moderate way and frankly don't know what they are talking about.
  • edited June 2023
    But PRWCX has been closed for years. This is why there is interest in the new ETF TCAF (see a nearby thread). It is 100% equity but is managed by Giroux (who also manages PRWCX).

    Of course, once TCAF has some record, its proper comparison would be with VFIAX /VOO, SCHB, SCHD, etc.
  • Tarwheel said:

    Personally, I’m very optimistic about balanced funds right now ... my primary balanced fund (FBALX) has decent three and five year returns.

    I certainly wish I had put all of our nut into FBALX 11y ago --- forget going back to 1986 --- when I stopped working on staff fulltime, and more important left it alone. Instead of the choices I did make. Woulda done rather better by now.
  • FBALX is not far behind PRWCX and it’s open to new investors, has a low expense ratio, and has very consistent returns. I’m considering opening a position in TCAF, would prefer a fund rather than ETF for various reasons.

    My Roth IRA is mostly with T Rowe Price but I’ve gradually been moving from TRP to Fidelity funds. I’m ticked at TRP for not letting me invest in PRWCX even though I’ve invested with them for 30+ years. Their other choices for balanced and allocation funds at TRP are mediocre at best. PRWCX’s returns are meaningless for other investors who can’t own it, and it’s returns are not matched by other TRP funds.
  • I, too, have settled for FBALX (blocked from PRWCX). Can't be part of the "cool kids" club.

    Very, very few funds can continue to outperform over long stretches of time, especially when they grow in size. Giroux has been great. Will that really continue?

    Answer: YES.
    Why: Because I don't own any.
  • This isn't the only board where folks are fond of PRWCX.
    Someone on Big Bang! recently started a thread titled "How can we match or beat PRWCX?".
    Link
  • edited June 2023

    This isn't the only board where folks are fond of PRWCX. Someone on Big Bang! recently started a thread titled "How can we match or beat PRWCX?"

    Cheers!

  • msf
    edited June 2023
    Tarwheel said:

    My Roth IRA is mostly with T Rowe Price but I’ve gradually been moving from TRP to Fidelity funds. I’m ticked at TRP for not letting me invest in PRWCX even though I’ve invested with them for 30+ years.

    A very long time ago (more than 30+ years), there was a Winston cigarette jingle: It's not how long you make it (30+ years), it's how you make it long (building assets in T. Rowe Price).

    PRWCX is open to investors who have more than $250K invested with T. Rowe Price.
    https://www.troweprice.com/personal-investing/about/client-benefits/index.html

  • edited June 2023
    It's a sign of times.

    Giroux is hot and T Rowe Price has put gates around him by keeping PRWCX closed to most investors. As you know, anything gated is prized now - you put gates and crowd will come looking in.

    In the BB thread on how to beat PRWCX, I suggested the new ETF TCAF for equity and multisector bond funds (PONAX / PIMIX, FADMX, etc), and then wait of the record to develop (as there isn't any history to show), but posters there like to post histories from PV runs, etc.

    At other forums, in the heydays of VWINX, there were many posts on how to model or beat VWINX (my model was VYM + VCIT), but nobody does that now. There is a thread at M*, "Why Hold VWINX" now.
  • edited June 2023

    Someone on Big Bang! recently started a thread titled "How can we match or beat PRWCX?"

    .

    Looks like Berkshire has managed to beat it. I’m getting average annual returns for 10 years as follow: +11.53% for BRK.A / +11.43% for BRK.B / +10.79% for PRWCX. Double-check my numbers before buying. They’re from different sources and could be based on somewhat different time spans or criteria. Each has a unique set of risks of course. With the former you could move in and out pretty much at will (tax deferred accounts anyway), possibly skimming profits on the high end. With the latter you get much broader diversification but are limited to an extent by TRP’s prohibitions against frequent trading as well as any restrictions / fees your brokerage may impose in that regard.
  • It's easy to beat PRWCX on a raw return basis. VOO/VFIAX will do. The question is whether you can do it with an only moderately volatile investment.

    VOO beats BRK.A over ten years with less volatility. Thus a better Sharpe ratio (higher returns divided by lower volatility).

    PRWCX beats both of them on risk adjusted return (as measured by Sharpe ratio or Sotrino ratio).

    Comparison at Portfolio Visualizer
  • If only I had a dollar for every time someone proclaimed the death of the 60/40 portfolio!
    Link

    Both stocks and high-quality bonds experienced double-digit losses in 2022 which is very rare.
    Some historians claim 2022 was the worst-ever year for U.S. bonds.
    Link

    Bond yields have increased significantly since the start of last year
    and the Fed funds rate appears to be nearing its peak during this cycle.
    In the coming years, high-quality bonds will provide "ballast" for equities
    and generate greater returns than in the recent past.

  • In the BB thread on how to beat PRWCX, I suggested the new ETF TCAF for equity and multisector bond funds (PONAX / PIMIX, FADMX, etc), and then wait of the record to develop (as there isn't any history to show), but posters there like to post histories from PV runs, etc.

    now.

    This is what I’m considering. I’m thinking about selling my remaining shares in TRPBX and splitting the money about two-thirds in TCAF and one-third in FADMX. I just wish I could do a direct exchange into TCAF but Fidelity says I have to sell first and then reinvest later. It seems like every time I sell a fund and buy another one the next day the markets work against me.
  • @Tarwheel, in my margin accounts (Fido, Schwab), I would be able to enter sell for TRPBX (T+1), and then right away buy TCAF (T+2) and enter buy for FADMX (T+1) without any margin interest. Some other variations may dock me with 1 day margin interest.

    Normal for exchanges involving different fund families would be a 2-day trade, sell TRPBX on day1, buy FADMX on day2.

    Without margin, entering the sell order for TRPBX first may help. The experience would vary depending on whether the broker wants cash in hand vs accepts settlement dates for buy orders.
  • msf said:

    It's easy to beat PRWCX on a raw return basis. VOO/VFIAX will do. The question is whether you can do it with an only moderately volatile investment.

    VOO beats BRK.A over ten years with less volatility. Thus a better Sharpe ratio (higher returns divided by lower volatility).

    PRWCX beats both of them on risk adjusted return (as measured by Sharpe ratio or Sotrino ratio).

    Comparison at Portfolio Visualizer

    By Sharpe and Sortino, QQQ is the winner.

    I like to look things up.:)
  • edited June 2023
    First, 60/40 is just an idea, an investor can be in 50/50 and all the way 100/0. It depends on someone's age and goals.
    PRWCX is a unique go-anywhere fund. It's not your typical 60/40. PRWCX excels in risk-adjusted performance and can be measured by the Sharpe ratio. Most investors don't have the patience to hold funds for many years. Another good idea is to use only 3-5 funds. The more you diversify, the chances are your portfolio will not beat the indexes and why Buffett said "Diversification is a protection against ignorance". Other than that, Buffett recommended the SP500, not even 5 funds.
    BTW, PRWCX beat 60/40 (SPY/PIMIX) since volatility peaked up in 2018. It had better performance, Sharpe, Sortino + close SD. see results (link).
  • Performance is less stable than SD, so both Sharpe and Sortino Ratios are also less stable. In fact, optimizing them may just lead to performance-chasing.
  • edited June 2023
    FD1000 said:

    [snip]
    The more you diversify, the chances are your portfolio will not beat the indexes and why Buffett said "Diversification is a protection against ignorance".
    [snip]

    Warren Buffett speaking to MBA students:

    "If you are not a professional investor; if your goal is not to manage in such a way that you get a significantly better return than the world, then I believe in extreme diversification.
    I believe that 98 or 99 percent —maybe more than 99 percent—of people who invest should extensively diversify and not trade.
    That leads them to an index fund with very low costs.
    All they’re going to do is own a part of America.
    They’ve made a decision that owning a part of America is worthwhile.
    I don’t quarrel with that at all. That is the way they should approach it."

  • edited June 2023
    You can find Buffet quotes to support almost any approach, ISTM. I thought @FD1000 made some good observations (for a change). I like Buffet’s saying about “not swimming naked” the best. When “the tide goes out” you may become suddenly “over-exposed” - and the sight isn’t always pretty.:)

    Agree with @Observant1 that Buffet has spoken in favor of index investing. I like Buffet and the philosophy at BRK a lot. But personally, going all in on any index doesn’t agree with me. It’s interesting that BRK doesn’t adhere to any index I know of. They like insurance a lot as a conservative income generating business. I get the idea that it serves as a “safety-net”, providing protection against their more aggressive forays (like AAPL).

    Great discussion. Actually, what caught my attention in the FT article (linked) was a reference to Blackrock’s having spoken out somewhat despairingly about the 60/40 allocation in today’s market. They didn’t say not to use it … more like lighten up and seek out alternatives. Well, I checked their alternative fund, BAMBX, and it hasn’t exactly lit the house on fire.
  • Performance is less stable than SD, so both Sharpe and Sortino Ratios are also less stable.

    True enough.

    Though here, PRWCX has had better risk adjusted return figures for all 10 decade-long periods (the duration used in the original article) from June 2004- May 2014 through June 2013 - May 2023 (the last decade-long span covered by Portfolio Visualizer).

    The relative superiority of PRWCX based on risk adjusted returns has been rock steady for ages.

    (Note: I used VFIAX instead of VOO to extend the comparisons all the way back to 2004.)
  • edited June 2023

    FD1000 said:

    [snip]
    The more you diversify, the chances are your portfolio will not beat the indexes and why Buffett said "Diversification is a protection against ignorance".
    [snip]

    Warren Buffett speaking to MBA students:

    "If you are not a professional investor; if your goal is not to manage in such a way that you get a significantly better return than the world, then I believe in extreme diversification.
    I believe that 98 or 99 percent —maybe more than 99 percent—of people who invest should extensively diversify and not trade.
    That leads them to an index fund with very low costs.
    All they’re going to do is own a part of America.
    They’ve made a decision that owning a part of America is worthwhile.
    I don’t quarrel with that at all. That is the way they should approach it."

    Why not use the full quote, which is exactly what you said " Buffett said "Diversification is a protection against ignorance". Other than that, Buffett recommended the SP500

    BTW, I held several funds in the past that beat the SP500. During 2000-2010, the SP500 lost money, I owned each of the following about 8-9 years SGIIX/SGENX,FAIRX,OAKBX, see (https://schrts.co/Cwpbphqk). I also owned PIMIX which beat the SP500 for several years too, see (https://schrts.co/eFdkpeJf)
  • @FD1000. Question for you sir

    Would you say it's harder now and going forward as the market dynamics have changed. Meaning markets are driven more by flow, folks putting money in every month via 401k, company share buy backs, small investors using options more, central bank intervention, less capital intensive companies out there, meaning software based etc....

    Best regards

    Baseball fan
  • It depends. Someone who mostly buys and holds and what most should do, has no issues. Trading markets since Covid started is harder. Risk/volatility is elevated, market changes have been faster. I changed too because of it. I trade more often, think weeks instead of months. I stay more in MM. But, volatility makes it easier to trade. Sideways is harder.
    Basically, I tell investors to stay within their skills. If trading worked for you which means, you look at your portfolio risk-adjusted performance over 3-5-10 years and it's better than the indexes, keep doing it. Otherwise, stop. Most should just use only 3-5 funds with a mix of indexes and managed funds and hardly do anything.

  • Giroux is hot and T Rowe Price has put gates around him by keeping PRWCX closed to most investors.

    I find Giroux fascinating. He will have to underperform eventually for a while, right??? Yet I keep watching him crush it. I sometimes wonder what would have happened if Peter Lynch didn't retire in 1990. Could he have kept it going, or would his magic touch disappeared? Over a 13 year period, he put up 29% annual returns. I don't think it would have lasted, even if Fidelity shut the doors on Magellan to prevent asset bloat. I just don't know what to make of Giroux. I keep watching for him to stumble, although I invest in PRWCX so I am not hoping for that to happen.

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