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Why the Old 60/40 Split Doesn’t Work

Following is a must-read excerpt from Bloomberg:

Why traditional diversification is ‘downright dangerous’

“For nearly 70 years, many investors and investment advisors used a basic formula to guide them in creating diversified portfolios: the 60/40 (60 percent/40 percent) stock/bond split.

The strategy worked well: It returned 10 percent a year from 1990–2011.

The question now—as the number of asset classes and strategies available cheaply to investors proliferates, and the risk of holding U.S. bonds rises—is whether the classic 60/40 portfolio split has outlived its investment usefulness and, if so, what should replace it?

For all practical purposes, the short answer is yes, according to Burt Malkiel, Wealthfront chief investment officer, Princeton professor and author of the investment classic, “A Random Walk Down Wall Street,” a book that helped launch the low-cost index-investing revolution.

Malkiel recently told CNBC that the 60/40 rule was an oversimplification from the beginning. Now he thinks it is downright dangerous. “The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40.”…

Andrew Ang, the Ann F. Kaplan Professor of Business at Columbia Business School, called the 60/40 rule a shorthand for the concept of diversification. It has been embedded in the investing mind-set since 1952, when Harry Markowitz introduced Modern Portfolio Theory. But in the ’50s, there were only two asset classes available cheaply—stocks and bonds, Ang said…

Investors who let go of oversimplification and embrace a slightly more complex but still low-cost portfolio will be better prepared to meet changes in their lives and the economy…”

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