Investors follow the 60/40 rule because they are told bonds will protect capital while equities grow it. Why recent drops in bond prices should make us reconsider that rule.
By Paul MacDonald, CIO, Harvest ETFs
(Sponsor Content)
From the moment they start putting money in the market, investors are told to follow the 60/40 rule. It is the broadly accepted wisdom that, for an average retail investor, a 60% allocation to equities and a 40% allocation to bonds will result in a robust portfolio. Equities should deliver growth prospects in the long term while bonds will offset downsides in equities by delivering uncorrelated returns. Bonds preserve capital, and equities grow capital. That’s the accepted wisdom.
Countless investment fund issuers have packaged this logic into their balanced funds. These funds offer a specific allocation to equities and bonds, usually in line with the 60/40 rule, forming the core of a retail investor’s portfolio.
The problem with accepted wisdom is sometimes circumstances turn it upside down. In the past months we have seen volatility in equity markets and a significant drop in bond prices. That is because the investment landscape has changed.
Why are bond prices dropping?
After over a decade of historically low interest rates, followed by massive rate cuts by central banks at the onset of the COVID-19 pandemic, inflation has begun to set in. With rising inflation comes pressure on central banks to raise rates and market expectation that rates will rise, which is itself pushing interest rates higher. Continue Reading…