What type of returns should investors expect in the next decade?
One of the most popular portfolios isn’t living up to its expectations. Supposedly, the 60/40 portfolio diversification (60% stocks and 40% bonds) provides enough growth via stocks — while reducing bonds’ volatility.
Bond and stock prices traditionally move in opposite directions, but the two have moved in sync in 2022:
- Bonds: The iShares 20 Plus Year Treasury Bond ETF (NASDAQ:TLT) — which tracks an index of Treasury Bonds — is down 15% in 2022.
- Stocks: Major US stock index, the S&P 500, is down 8% this year.
Rising interest rates will likely put even more pressure on the 60/40 portfolio.
- Bond prices tend to fall as interest rates rise — and Bank of America expects long-term bond yields to continue growing.
- Stock prices are likely to be dragged down by rising interest rates in the short term.
Here’s what this means for investors over the next decade…
Setting expectations: Vanguard’s LifeStrategy Moderate Growth Fund — a 60/40 portfolio returned 9.1% annually between Dec. 2011 and 2021.
But Vanguard cautioned investors to expect that returns will be half this number for the next decade.
Investors will have to take more risk or invest in alternative investments to meet the returns from the previous decade.
- Invesco recommends a 50/30/20 portfolio — 50% stocks, 30% bonds and 20% alternative assets.
- Alternative assets span everything beyond stocks and bonds, including real estate, wine and cryptocurrencies.
With inflation destroying the purchasing power of cash and crypto moving closely with stocks — investors have fewer and fewer places to hide.