High prices, low rates, and a tendency for stocks and bonds to move too closely together has pushed many advisors to ditch the 60% stocks and 40% bonds formula for portfolios. Barron’s asked a handful of top advisors what they’re doing instead.
Brenna Saunders, partner & wealth planner, Creative Planning: The new retiree needs their portfolio to stretch for possibly decades, given longer life expectancies, so Saunders generally advises investing in enough bonds to get through a prolonged bear market, and to sink the remaining into investments with a higher upside than bonds. Instead of investing in bonds using the 60/40 formula—which is less likely achieve an investor’s goals—those assets are directed to publicly traded equities.
Jay Winthrop, partner, Douglass Winthrop Advisors: Winthrop looks to bonds as an alternative to cash, and usually defaults to giving more weight to equities. But that’s not advantageous with current interest rates. So instead they are adding in other factors, looking more to companies with both a high degree of pricing power and a low degree of capital intensity, as well taking a more global view.
Andrew Burish, advisor, UBS: Rather than the 60/40 formula, Burish prefers a 45/25/30 split: 45% in U.S. and foreign equities (weighted 30% to small-, mid-, and large-cap stocks, and 15% to foreign), 25% in short-term fixed income, and 30% in alternative investments, which could be a mix of private equity, hedge funds, and private real estate. For investors that need income, they’ll take a liquidity approach, taking out 1-3 years of income that’s kept in a separate strategy with short-duration fixed-income investments.
Matt Gulbransen, president, Pine Grove Financial Group: First, Gulbransen is resetting his clients’ expectations. While he’s not totally abandoning the 60/40 model, he’s now taking 20% of that allocation and looking for alternatives such as real estate that can produce the same kind of returns as bonds without the interest-rate or credit risk. In addition, he’s delving more into hedging-type strategies to try to limit volatility in his clients’ portfolios.
Scott Tiras, advisor, Ameriprise: One approach Tiras takes is to add more exposure to non-traditional equities and lower fixed-income exposure to 30%. Then, he lowers the risk in equity portfolios to balance out the additional market risk. For fixed income, he’s bringing in more TIPS and ETFs and funds that have more credit than interest rate risk.