New Data: The 60/40 Portfolio Problem Facing Financial Advisors

December 7, 2020

Download ‘The 60/40 Problem’

The Co-Founders of Blueprint Investment Partners, Jon Robinson and Brandon Langley, have updated their flagship research paper, “The 60/40 Problem,” which helps financial advisors think about the pitfalls of a traditional 60/40 portfolio, especially given the uncertain rate environment fueled by more than 40 years of declining interest rates. The white paper also examines whether introducing the concept of “time diversification,” which is achieved through a systematic investing process, can improve performance.

“Like a landline telephone or an 8-track tape, the 60/40 may still technically function – but it isn’t as effective as the alternative,” says Robinson. “Brandon and my research looks at 120 years of data within four interest rate regimes. That gave us a robust sample size to compare a bought-and-held 60/40 strategy to trend-followed portfolios. The data showed that applying trend following improved risk-adjusted performance across every interest rate regime since 1900. And, in terms of absolute performance, trend following lagged in just one time period – but only by less than 10 basis points.”

The white paper uses several metrics to compare the buy-and-hold and trend-following strategies, including:

  • Compound annual growth rate
  • Annualized volatility
  • Maximum drawdown
  • Sharpe ratio

The original version of the paper was published in August 2018. In late 2020, Robinson and Langley decided to update the data to re-test the original findings.

“Despite the historical uniqueness of the current market environment, we found that the problems associated with a 60/40 portfolio remain as relevant now as they were in 2018, if not more so,” adds Langley. “While the 60/40 approach has been the bread-and-butter strategy that helped millions of investors retire comfortably in the past, the question is: Will it allow the next generation to also do so? Based on our research, we worry the answer is, ‘No.’ We think prudent advisors may want to explore how to incorporate efficient, robust risk management processes that attempt to solve the 60/40 problem.”

About Blueprint Investment Partners

Blueprint Investment Partners is an asset manager and pioneer in the creation of systematic, process-driven, and transparent investment strategies for financial advisors and institutions. The firm was founded on a management philosophy honed by its co-founders during the 2008 financial crisis. Blueprint applies a rules-based approach to both asset class and time diversification, instilling discipline and removing human bias during emotionally charged market environments. The firm offers and sub-advises a suite of distinct global investment portfolios that are distinguished by their risk tolerance or ESG objectives, with the models delivered as separately managed account strategies and a mutual fund.

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