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Market MovesJuly 27, 2020

A 60-40 Portfolio Is Still the Bomb, Says Vanguard

Some have questioned the conventional asset split, but its performance during this messy year shows its worth, the firm declares.

By Larry Light

Maybe the classic 60-40 stock-bond combo works well, after all. The changing nature of equity and fixed-income markets had some believing that the 60-40 mix had become a dull artifact of the past. Then came the travails of 2020 to reintroduce investors to the virtues of the old allocation.

The harsh realities of the pandemic and its toxic effect on the economy demonstrate the sturdiness of 60-40, according to the Vanguard Group’s mid-year investing review. The thesis behind having 60% of your portfolio in stocks and 40% in bonds or other safer assets is that this is the ideal balance between the need for investment growth, particularly in the good times, and ballast for when ill winds blow.

Last year, the Bloomberg Barclays US Aggregate, which measures investment grade bonds including Treasury issues, rose 8.7%. Now, that’s a far cry from the S&P 500’s 30.4% return in 2019, but the perceived safety of bonds has made them more appealing to a big chunk of investors since the 2008-09 financial crisis.

Many investors have gone bond heavy. The long-term trend continues of redemptions from stock mutual funds and inflow for bond funds, according to the Investment Company Institute (ICI).

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But late last year, a research note published by Bank of America Global Research contended that “there are good reasons to reconsider the role of bonds in your portfolio,” and to tilt the mix toward stocks.

“The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies,” the note read.

Not so fast. For the first part of the year, through March 23, when investors were panicking over a seeming collapse of the economy, stock (in the form of the MSCI All Country World index) took a pounding, losing 31.7%, Vanguard wrote. But bonds, represented by the Barclays Agg, dipped a mere 0.1%. This was this despite a harrowing two-week stretch when investors were selling everything. The result was that the bonds’ better performance caused the 60-40 allocation to lose 20.1%.

Then, from March 24 through June 30, stocks soared 37.8% and bonds nudged up 3.6%. End result, for the year’s first half: Stocks lost only 6% and bonds gained 3.5% for a six-month portfolio total of 1.5% down.

Part of Vanguard’s rationale for why 60-40 should hold up going forward is that short-term interest rates are near zero, thanks to the Federal Reserve. Result: bond price appreciation has little runway left. If bond yields can’t go much lower, then their prices (which move in the opposite direction) can’t move much higher. But bonds still can fulfill their mission as a balancing influence for ever-volatile equity.

“The Fed expects to keep yields low till 2022,” said Andrew Patterson, a Vanguard senior economist, in an interview. “Bonds offset lows and temper highs” of stocks.

Research Calls Lack of Diversity Atop Financial Regulators a ‘Bipartisan Failure’

There has never been an African American chair of the SEC, CFTC, or FDIC.

By Michael Katz

Democrats and Republicans almost never act in a bipartisan matter these days, but there is at least one common trait the parties share: a failure to appoint African Americans to lead the country’s financial regulators.

This is according to a new research paper written by Georgetown University law professor Chris Brummer, which offers empirical evidence that shows a systemic absence of African American leaders at financial regulatory agencies.

“The data demonstrate unambiguously that the contemporary deficit of African American regulatory representation is a bipartisan failure,” the paper stated. As a result, Brummer writes, African Americans have had almost no say in the shape and operation of finance.

“Perhaps one of the biggest open secrets in Washington, D.C., is the virtual absence of African American financial regulators in the United States government,” said the paper. “Across the federal government, they are missing, and have been missing for generations, with at best short appearances by single political appointees two to three years at a time.”

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According to the research paper, there are no African American commissioners at the Securities and Exchange Commission (SEC) or at the Commodity Futures Trading Commission (CFTC), and there has never been a Black chair of the SEC, CFTC, or Federal Deposit Insurance Corporation (FDIC).

“Today, the staffs of political appointees—whether Democrat or Republican—are, with few exceptions, almost devoid of African Americans,” the paper said.

Although a lack of diversity is not uncommon at many US institutions, the paper indicates that it is particularly lacking among leadership at financial regulators. Brummer puts it in perspective by pointing out that 98 of the 141 Black members of Congress elected since 1900 have been elected within the past two decades; at least 140 African American judges are currently on the judiciary at all levels of the federal courts, and 11% of new directors on boards of S&P 500 companies have been Black.

“The absence of African American financial regulators poses enormous challenges from the standpoint of participatory democracy and economic inclusion,” said the paper. “The absence of African Americans deprives the community from having members present in decisions that not only impact them directly, but are often made in their name.”

Because no data or record is kept of the ethnic makeup of political appointees or their staffers, Brummer said the full extent of the dearth of Black leaders at financial regulators remains undocumented and clouds the full scope of the problem.

“The absence of Black regulators has received scant attention from financial journalists, nonprofits, special interest groups, and academics,” said the paper. “As a result, the decisionmaking process, from agency nominations to subsequent staffing decisions by newly confirmed regulators, remains shrouded in secrecy and lacks the transparency necessary for a fact-driven dialogue.”