Revisiting “Rethinking Investing in a Post-60/40 World”
This article is relevant to financial professionals who are considering offering Model Portfolios to their clients. If you are an individual investor interested in WisdomTree ETF Model Portfolios, please inquire with your financial professional. Not all financial professionals have access to these Model Portfolios.
Let’s remind ourselves of the investment mandates we were solving for when we built these Model Portfolios back in 2019.
First, most investors have four common investment objectives with respect to their investment portfolios (though each person’s “weighting” to an objective may differ):
1. Maintain or improve their current lifestyle
2. Do not outlive their money
3. Ensure that family legacy or impact/philanthropic goals can be met
4. Minimize fees and taxes along the way
These common objectives face two primary challenges as we look out over the investment horizon.
1. Low interest rates: Interest rates remain very low, and we simply do not see many catalysts for driving them significantly higher into the foreseeable future. Accommodative central bank policies, an aging population and the corresponding demand for “hedge assets” to equity market risk are all working to keep rates low. Rates may grind higher from where they are today as the global economy recovers, but that is on a relative not absolute basis. Currently, Treasury levels of real interest rates are negative across the entire yield curve, suggesting investors are locking in the loss of purchasing power if they buy and hold those bonds until maturity. Even including corporate bonds, the starting yield has been an extremely accurate predictor of future bond returns, further compounding the issue facing investors down the road. The implication is that it will remain difficult to generate sufficient current income or generate future returns out of a fixed income portfolio to maintain or improve current lifestyles without taking unwanted additional risk (i.e., increased duration or credit risk).
Figure 1: U.S. Treasury Real Yields (%)
Figure 2: Bloomberg Barclays U.S. Aggregate Bond Index
2. Lower forecasted equity returns: The potential return on any investment is at least partly a function of what you pay for it today. Given today’s equity market valuations, investors may potentially face a lower return regime going forward. Our own estimates are for roughly 4.5%–5% real return versus a historical real return rate of 6.5%–6.7%. The implication is that it may be more difficult to build Model Portfolios that have a sufficient longevity profile to accommodate increased life expectancies without taking on additional equity risk.
So, the question becomes—how can we build a “better mousetrap” than the traditional “60/40” Model Portfolio that can potentially address most investors’ mandates in the face of current and expected future market environments?
Fortunately, there are things we can do. First, drawing on the research of Dr. Jeremy Siegel of the Wharton School, we know that, over a reasonable time horizon, even the worst-case scenario in stocks has been better than that of bonds or cash.
Our internal analysis, based on capital market assumptions of a real equity return of 4.5%–5% for equities and a real return of 0% for bonds, suggests that a 75% allocation to equities accomplishes two objectives versus a traditional “60/40” portfolio: (1) it potentially minimizes the probability of outliving your money over a 30-year time horizon, and (2) it also potentially increases the ability to fund legacy objectives.
On an additional note, current dividend yields from the equity markets remain comparable to the nominal 10-Year Treasury yield. We argue, however, that equity dividend yields are far more sustainable, with expected improvement as earnings and the economy recover. In addition, we believe equities hold the potential for upside total return, while bonds do not (if held to maturity).
The Siegel-WisdomTree Model Portfolios
It was with these “facts on the ground” that, in collaboration with Dr. Jeremy Siegel of Wharton, a since-inception strategic advisor to WisdomTree, we constructed the Siegel-WisdomTree Model Portfolios—a Global Equity Model Portfolio and a “flagship” Longevity Model Portfolio. The Longevity Model Portfolio is explicitly our attempt to build a “better mousetrap” to the traditional 60/40 Model Portfolio:
1. A 75% (as the policy weight) allocation to yield-focused equities to improve current income generation, the longevity profile and the legacy potential of the overall portfolio (investor objectives 1, 2 and 3). The yield-focused nature of the selected equity securities means they tend to have a lower equity beta.
2. The fixed income allocation is constructed for quality income generation in a risk-controlled manner and to act as an appropriate equity risk hedge (investor objective 1).
3. Selectively implement alternatives such as commodities to help maintain purchasing power over time (investor objective 2).
4. The portfolio is constructed entirely with ETFs, to potentially optimize fees and taxes (investor objective 4).
We built the global all-equity Model Portfolio on the same principles, but in recognition that many advisors prefer to manage their own fixed income portfolios and/or want to create different risk profile portfolios than our suggested 75/25.
The potential results of our asset allocation, portfolio construction and security selection decisions are:
1. Improved current income generation
2. A better longevity profile (i.e., reduced short-fall risk)
3. Better potential for funding legacy objectives
4. An expected slightly higher standard deviation than a traditional 60/40 portfolio. That is, the investor and advisor are accepting slightly higher short-term volatility in exchange for increased current income and a better longevity profile.
We launched these models in late 2019, so they now have almost two years of live performance under fairly extreme market conditions (in both directions), and, so far, they have performed as expected both from a total return and a yield perspective. The current allocation to “alternatives” reflects the fact that we took positions in gold and broad-basket commodities at different times after we launched to mitigate the perceived risks of inflation as the economy recovers.
Figure 5: Model Performance
For standardized performance of underlying funds, please click here.
For definitions of Indexes, please visit our glossary.
We launched the Siegel-WisdomTree Model Portfolios in an attempt to address what we believe are some of the primary issues and conditions that investors face now and will face into the foreseeable future. Our view is, simply, that the traditional “60/40” portfolio will face significant headwinds in meeting investor objectives as we move through this decade and the next. We believe we have succeeded in constructing a better “mousetrap.”
Financial advisors can learn more about these models, and how to successfully position them with end clients, at our newly launched Model Adoption Center.
Important Risks Related to this Article
WisdomTree’s Model Portfolios are not intended to constitute investment advice or investment recommendations from WisdomTree. Your investment advisor may or may not implement WisdomTree’s Model Portfolios in your account. The performance of your account may differ from the performance shown for a variety of reasons, including but not limited to: Your investment advisor, and not WisdomTree, is responsible for implementing trades in the accounts, differences in market conditions, client-imposed investment restrictions, the timing of client investments and withdrawals, fees payable and/or other factors. WisdomTree is not responsible for determining the suitability or appropriateness of a strategy based on WisdomTree’s Model Portfolios. WisdomTree does not have investment discretion and does not place trade orders for your account. This material has been created by WisdomTree, and the information included herein has not been verified by your investment advisor and may differ from information provided by your investment advisor. WisdomTree does not undertake to provide impartial investment advice or give advice in a fiduciary capacity. Further, WisdomTree receives revenue in the form of advisory fees for our exchange-traded Funds and management fees for our collective investment trusts.
WisdomTree Model Portfolio information is designed to be used by financial advisors solely as an educational resource, along with other potential resources advisors may consider, in providing services to their end clients. WisdomTree’s Model Portfolios and related content are for information only and are not intended to provide, and should not be relied on for, tax, legal, accounting, investment or financial planning advice by WisdomTree, nor should any WisdomTree Model Portfolio information be considered or relied upon as investment advice or as a recommendation from WisdomTree, including regarding the use or suitability of any WisdomTree Model Portfolio, any particular security or any particular strategy. In providing WisdomTree Model Portfolio information, WisdomTree is not acting and has not agreed to act in an investment advisory, fiduciary or quasi-fiduciary capacity to any advisor or end client, and has no responsibility in connection therewith, and is not providing individualized investment advice to any advisor or end client, including based on or tailored to the circumstance of any advisor or end client. The Model Portfolio information is provided “as is,” without warranty of any kind, express or implied. WisdomTree is not responsible for determining the securities to be purchased, held and/or sold for any advisor or end client accounts, nor is WisdomTree responsible for determining the suitability or appropriateness of a Model Portfolio or any securities included therein for any third party, including end clients. Advisors are solely responsible for making investment recommendations and/or decisions with respect to an end client and should consider the end client’s individual financial circumstances, investment time frame, risk tolerance level and investment goals in determining the appropriateness of a particular investment or strategy, without input from WisdomTree. WisdomTree does not have investment discretion and does not place trade orders for any end client accounts. Information and other marketing materials provided to you by WisdomTree concerning a Model Portfolio—including allocations, performance and other characteristics—may not be indicative of an end client’s actual experience from investing in one or more of the funds included in a Model Portfolio. Using an asset allocation strategy does not ensure a profit or protect against loss, and diversification does not eliminate the risk of experiencing investment losses. There is no assurance that investing in accordance with a Model Portfolio’s allocations will provide positive performance over any period. Any content or information included in or related to a WisdomTree Model Portfolio, including descriptions, allocations, data, fund details and disclosures, are subject to change and may not be altered by an advisor or other third party in any way.
WisdomTree primarily uses WisdomTree Funds in the Model Portfolios unless there is no WisdomTree Fund that is consistent with the desired asset allocation or Model Portfolio strategy. As a result, WisdomTree Model Portfolios are expected to include a substantial portion of WisdomTree Funds notwithstanding that there may be a similar fund with a higher rating, lower fees and expenses or substantially better performance. Additionally, WisdomTree and its affiliates will indirectly benefit from investments made based on the Model Portfolios through fees paid by the WisdomTree Funds to WisdomTree and its affiliates for advisory, administrative and other services.
References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.