Competition Heats Up Between BlackRock and Goldman in Battle Over 60/40 Portfolio Allocation

Leading names in asset management and investment banking are divided in their opinion of the traditional portfolio structure of 60% stocks and 40% bonds, following a poor performance of the 60/40 model in the previous year.
BlackRock is a company whose stock is currently valued at 0.00%.

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It has been argued that the losses experienced by a 60/40 portfolio, which are the worst in nominal terms since the financial crisis of 2008-9 and the worst in real terms in a calendar year since the Great Depression, demonstrate that the structure is outdated. Goldman Sachs, however, disagrees, asserting that the occasional large loss is unavoidable in any strategy and that 60/40 is still a valid fundamental approach. Strategists and fund managers from other major money managers and banks have been taking sides on the issue.

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For many years, the 60/40 portfolio has been seen as a reliable foundation for investors. However, if this is abandoned, investments that were once considered unusual, such as private debt and equity, commodities, infrastructure and inflation-linked bonds, can be used as part of the portfolio. If the 60/40 portfolio is kept, these investments can be used as supplementary components.
The 60/40 split of a portfolio has both its pros and cons, making it a debatable starting point.

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The 60/40 portfolio has become the standard for many investors, although some may prefer a 50/50 or 70/30 split for more caution or aggressiveness, respectively. This portfolio provides a good balance of growth potential from stocks and steady income from bonds, as well as a cushion during economic downturns when stock prices tend to drop and bond yields usually fall, increasing bond prices. Additionally, it is a relatively simple portfolio to manage.

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In 2020, the stock market experienced a significant downturn, with the Dow Jones U.S. Total Stock Market index dropping 19.5% including dividends. The ICE BofA U.S. Treasury index also saw a decrease of 12.9%. This caused a 60/40 U.S. portfolio to have one of its worst years ever, as bonds failed to provide the expected returns. As we move into 2022, the question remains whether this was an anomaly or if bonds will return to their usual performance.

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Maintaining a 60/40 portfolio is a sensible approach, as it provides a neutral base when predicting the future is uncertain. Although bonds and stocks have both experienced losses simultaneously in the past, this is not a common occurrence.
Sharmin Mossavar-Rahmani, head of the investment strategy group in the Goldman Sachs investment division and chief investment officer of wealth management, acknowledges that losses on both sides have occurred in the past and will likely occur in the future, though she notes that it is a rare occurrence.

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According to Goldman, U.S. stocks and bonds have only experienced a loss over a 12-month period 2% of the time since 1926. While it may be disheartening to have your investments be part of such an uncommon occurrence, it is not wise to make drastic changes to your portfolio unless you believe this is the beginning of a new trend.
BlackRock believes that the era of the "great moderation" is no longer in effect. Vivek Paul, the head of portfolio research at BlackRock Investment Institute, stated, "This is a different regime."

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In 1981, 10-year Treasury yields reached a high of 15.8%, but over the course of the next four decades, they dropped to a low of 0.5% in 2020. This provided bondholders with not only the guaranteed income, but also long-term capital gains. From 2000 onward, bonds also provided a good level of protection against losses on stocks, as the pattern of price movements changed so that stocks and bonds moved in opposite directions. This meant that when bond yields increased, stocks tended to rise, and when yields decreased, stocks tended to fall. Fortunately, this protection did not come at the expense of returns.

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It is unlikely that 10-year yields will decrease more than 15 percentage points in the next 40 years, as they are currently yielding around 3.5%. The relationship between bonds and equities appears to have reverted to the pattern of higher bond yields being detrimental to stocks, and vice versa, as investors are now more concerned with inflation than economic growth. This could be a long-term trend due to the inflationary pressure caused by deglobalization, demographics, and spending to address climate change.

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The active-passive argument is being discussed once more. If one believes that inflation is likely to increase in the future, it is sensible to hold fewer traditional bonds. However, if one is uncertain, as Ms. Mossavar-Rahmani has stated that the outlook is unclear due to the "heavy fog," then a 60/40 portfolio is a reasonable starting point.
An additional reason to consider a 60/40 portfolio is that many of the proposed alternatives to bonds had a dismal year in 2020. It may have been assumed that Treasury inflation-protected securities would provide protection from inflation, however, due to increasing real yields, TIPS lost almost the same amount as regular Treasurys since the beginning of last year.

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Investing in private markets does not guarantee protection from losses. Even if the fund manager does not disclose the losses, the value of a loan or company can still decrease when interest rates increase. Additionally, the fees associated with private markets are usually much higher than those associated with public markets.
At the beginning of 2022, commodities seemed like a sure bet due to the increasing cost of energy, metals shortages, and inflation. However, the current spot prices of crude oil, U.S. natural gas, gold, and copper are nearly the same as they were at the start of the year. This has not been a market for long-term investments.

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The issue at hand is that the Everything Bubble burst last year. Stocks, bonds, TIPS, and private assets were all overpriced due to the assumption of low interest rates. When the Federal Reserve acknowledged the truth, the prices dropped significantly. Now that the valuations are more reasonable for both stocks and bonds, a 60/40 equity/bond split is a good starting point for constructing a portfolio. Those who are more concerned about long-term inflation may want to add a bit more inflation protection than what is typically included.