60/40 Under Attack

We could be entering the Late Cretaceous period for the 60/40 investment portfolio, with a wave of critics forming an asteroid to wipe it out.

The latest naysayer: Paul McCulley, the former chief economist at investment giant PIMCO. On Bloomberg’s Odd Lots podcast this week, he said that if the 60/40 portfolio keeps working, “then democracy has failed.”

Okay, maybe it’s time to back up. The 60/40 investment portfolio encourages financial planners to invest in 60% equities and 40% bonds to achieve long-term success. It’s been coded into Wall Street’s DNA for decades, and provided solid returns for almost as long.

But increasingly, financial sages like McCulley argue that the Fed’s attempts to tamp down inflation have suppressed bond yields while inflating equity valuations—keeping the 60/40 split from working the way it’s supposed to. McCulley thinks this “disinflationary environment” that made the 60/40 mix an antique reflects larger systemic problems in the U.S. economy.

So what now? A whole lot of experimentation is underway, including expansion into alternative investments like real estate.