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.
Cart Master: Bring out yer dead!
Customer: Here's one…
Dead Person: I'm not dead!
Cart Master: 'Ere. He says he's not dead!
Customer: Yes, he is.
Dead Person: I'm not!
Cart Master: He isn't?
Customer: Well, he will be soon. He's very ill.
Dead Person: I'm getting better!
Customer: No, you're not. You'll be stone dead in a moment.
(From the film, “Monty Python and the Holy Grail,” released 1975)
We try to avoid hyperbole in our market commentary, so you will not find any references here to the death of the 60/40 portfolio (60% equities and 40% bonds). It is a tried-and-true moderate risk portfolio that has performed well for millions of investors over the years.
That said, it is not inappropriate to challenge conventional wisdom, as both we and others have done (e.g., Goldman Sachs, Deutsche Bank, Bank of America)1. We also were one of the first asset management shops to build Model Portfolios explicitly challenging the wisdom of a traditional 60/40 approach, specifically the Siegel-WisdomTree Models, which we launched in November 2019.
Let’s remind ourselves of the investment mandates we were solving for when we built and launched these Models.
First, most investors have four common investment objectives with respect to their investment portfolios (though each person’s “weighting” to an objective may differ):
Maintain or improve their current lifestyle (i.e., optimize current income)
Not outlive their money (i.e., make sure the portfolio lasts at least as long as they do)
Ensure that family legacy or impact/philanthropic goals can be met
- Minimize fees and taxes along the way
These common objectives face two primary challenges as we consider the investment horizon.
- Low interest rates: Interest rates remain very low, and though we do see them grinding higher from current levels as the economy improves—perhaps hitting 1.75%–2.00% by year-end—we simply do not see many catalysts driving them significantly higher in the foreseeable future. Massive federal debts and deficits, an aging population and the corresponding demand for assets to hedge equity market risk are all working to keep rates low by historical standards.
Currently, Treasury real levels of interest rates (the nominal rate minus the inflation rate) remain negative across the entire yield curve. In addition, corporate credit spreads remain historically tight. Assuming a buy and hold strategy, the “starting yields” on a bond historically have a been a good predictor of the expected return on that bond.
Today that yield (using the current 10-Year nominal Treasury rate of approximately 1.59% and an average corporate credit spread of approximately 0.89%) is roughly 2.48%.
The implication is that it will remain difficult to generate sufficient current income or future returns with fixed income portfolio to maintain or improve current lifestyles, without taking unwanted additional risk (i.e., increased duration or credit risk).