Complementary Asset Classes: Why Now?

As the first quarter drew to a close, Wisconsin residents looked out their windows to find gray skies and recurring snowfall. Meanwhile, investors in a traditional 60/40 portfolio looked at their accounts and saw an even more disappointing sight: negative figures for both the 60 (stocks) and the 40 (bonds) components. To say that this is rare is an understatement; major U.S. stock and bond indices have declined in tandem during a calendar quarter just eight times since 1990.

During that multi-decade period, the reliably low correlation of returns between stocks and bonds has been a boon for investors, offsetting each other's performance disappointments and providing incredible returns. In fact, the traditional 60/40 portfolio just produced the best 10-year outcome since 1954, as demonstrated by the right-hand endpoint of the red line in the chart below.

Figure 1

So why consider diversifying?

Given that (1) investors have benefitted from a market environment that reliably produced a source of positive returns from a 60/40 mix, and (2) we’ve just completed the best period for that mix in nearly 70 years of tracking, why would an investor want to consider a change?