Simon Hoyle (left), Dominic McCormick, Rob da Silva and Kristina Hermanson.

Is the 60/40 portfolio back and if so, why did it go away? This was a question posed at the Professional Planner 2023 Researcher Forum in Sydney on Monday.

Conexus Financial editor-at-large Simon Hoyle started the discussion off by noting that commentators often describe the 60/40 portfolio, where 60 per cent of a portfolio is allocated to stocks and 40 per cent to bonds, as the “living heart of investing”.

But he added that if you had a 60/40 portfolio, you probably lost money over much of the past two years when both stocks and bonds performed poorly because of soaring inflation and interest rates during the Covid-19 pandemic.

Da Silva Consulting principal Rob da Silva traced the origin of the 60/40 concept to Nobel Prize-winning US economist Harry Markowitz, who developed modern portfolio theory, “which sprouted efficient frontiers, portfolio optimisation and a whole spring of quantitative finance”.

“People were spending a lot of time and effort trying to figure out what the optimal portfolio was,” Da Silva said.

“From that sprang the 60/40 mix as a generally accepted conventional wisdom. I’m not sure there’s any one specific study that nails that number down, but it became the sort of go-to mix.”

Da Silva noted that in the earlier years, a 60/40 mix meant equities and bonds because these were what the US investing public was interested in.

“It’s only over the last decade or two that it’s kind of shifted to defensive versus growth, which I think is a much better way to look at it,” Da Silva said.

“But however you describe it, those numbers seem to have magically held fast. And, if you do all that sort of optimisation stuff, you are going to get close to that, whether it’s 50/50, 60/40 or 70/30.”

However, Da Silva cautioned that the 60/40 mix was not relevant to everybody and the right mix depended on an individual’s circumstances and risk-return tolerance.

Nuveen Natural Capital head of APAC and Africa, Kristina Hermanson, pointed to the direction of her firm’s parent company, US pension fund TIAA (the Teachers Insurance and Annuity Association of America), and how they used Nuveen to diversify with assets outside the equity/bond remit.

“[It’s] always looking beyond on the frontier of what’s beyond that 60/40,” Hermanson said.

“In terms of diversification, what we see from natural capital whether its farmland or timberland, is very low or negative correlation to other asset classes.”

Bonds ‘kind of’ back