Personal finance

Blackrock: Rebuilding Resilience in 60/40 Portfolios

Most investors haven’t been all-in on stocks. There tend to be other assets in the mix, such as bonds. That tends to provide solid diversification, as well as lower portfolio volatility overall.

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  • Yet 2022 saw the first year since the 1930s where both stocks and bonds dropped at the same time. And both did so by a sizeable amount. For investors with a traditional mixed portfolio of 60 percent stocks and 40 percent bonds, diversification proved ineffective.

    Typically, bonds and stocks tend to move in opposite directions. When high-flying stocks start coming back to earth, investors tend to invest more in stable investments like bonds.

    However, interest rates also play a role. The rapid rise in interest rates has led to a lowering of bond prices. Meanwhile, it’s led to a lower valuation for many companies out there today.

    How can investors avoid this challenge in the future? There are a few different strategies that can work. One is to recognize that bonds may perform well in a slowing economy, but not an inflationary one.

    Another factor is to diversify into alternative investments, such as real estate or rarities like artwork. These alternatives will diversify a portfolio best with their low correlation and high return potential.

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  • The goal isn’t to outperform the market on the way up, but rather to hold onto your gains during a market decline.

     

    To read the full blog, click here.