Traditionally, financial advisors and brokers have advised their clients to allocate 60% of their investments to equities and 40% to fixed income. In the 1980s and 1990s, "balanced" portfolios had impressive returns.

However, it has lost favor because of several circumstances, including a series of bear markets beginning in 2000 and historically low-interest rates. Some investors believe it takes more than stocks and bonds to create a balanced portfolio. As we'll see below, these experts think it's imperative to immediately adopt a far larger plan if we want to generate sustainable long-term growth.

The Market Is Changing

High equity valuations, unconventional monetary policies, increased risks in bond funds, and low commodities prices were only a few of the factors Rice cited for the seeming underperformance of the usual 60/40 mix that had been effective in past decades. The rapid spread of digital technologies also plays a role, with far-reaching consequences for economic development and company operations.

Investors and financial advisors have had a tumultuous first half of 2022 due to extreme market volatility. During his presentation at the CNBC Financial Advisor Summit, Schwab Asset Management CEO and CIO Omar Aguilar stressed the importance of rebalancing as a means of preparation for the year's second half.

He advised keeping long-term strategic goals in mind when making such portfolio modifications. Aguilar emphasized that panicking was not an option. "It's important to keep your long-term investment goals in mind while you make allocation decisions and keep an eye out for rebalancing opportunities."

Investing all of your resources in a single venture is risky because "the future is too unknown," Rice warned. Because the conditions that made 60/40 portfolios successful are no longer present, investors should not utilize them. In the past, investors may be satisfied with a 60/40 portfolio, but that's not even close these days. Overall, it was a breeze to finish, accomplished its goal, and is now behind me. The returns on stocks and bonds are no longer sufficient to offset expenses, increase our net worth, and safeguard us from inflation and market declines.

Common Equity and Bond Investments

Rice continued by citing the Yale University endowment fund as an illustration of how common equity and bond investments were insufficient to provide proper growth with tolerable risk. Only 5% of the fund is invested in stocks, and another 6% is in bonds of any kind; the rest, 89%, is dispersed over a wide range of businesses and asset classes. Although it is impossible to draw broad inferences from the allocation of a single portfolio, the fact that this is the fund's lowest allocation to equities and bonds in its history is notable.

Rice suggested that financial advisors look at other investment vehicles outside bonds, including master limited partnerships, royalties, emerging market debt instruments, and long/short debt and equity funds. Financial advisors would have to invest their SMB clients in this asset. However, in recent years, a proliferation of professionally or passively managed products that may provide diversity in multiple sectors has made this technique increasingly accessible to clients of all sizes.

Potential Resources for Investment

Inflation is the gradual erosion of purchasing power caused by an increase in the money supply. Twenty-four years at a modest inflation rate of 3% would result in a halving of the currency's purchasing power. Therefore, long-term investors should strive for a higher rate of return than the rate of inflation.

The next decade will be far more challenging for investors, even if they successfully outpaced inflation over the preceding decade due to high stock values and low bond yields. As a bonus, Shahidi shows that an alternative portfolio of 30% U.S. Treasury bonds, 30% Treasury inflation-protected securities (TIPS), 20% stocks and 20% commodities would yield roughly comparable returns over time with substantially less volatility. He uses data tables and graphs to show that his "e-balanced" investment strategy is more successful over time and throughout multiple economic cycles. This is because commodities and other inflation-linked assets (TIPS) tend to do well. Since two of his four asset classes will do well in each of the four economic cycles, he may earn competitive returns with significantly reduced volatility (expansion, peak, contraction, and trough).

Summing Up briefly

In some markets, a 60/40 allocation between equities and bonds can produce superior returns, but this approach is not without risks. Many analysts and investors now recommend diversifying portfolios to strike a balance between long-term gain and acceptable risk in light of the volatility of the markets during the past few decades.