Bloomberg Article: Sell-Everything Market Sends 60/40 Funds on Worst Run Since 2008

Stop sign on country road
March 15, 2022 by Matt McCracken

60/40 investment strategies, and the funds that deploy them, have a specific job:  Mitigate risk when equities decline.  That is their sole purpose and that is how they have been touted for well over a decade.  The financial services industry loves to promote "what would have worked yesteryear" as the ideal solution for tomorrow's crisis.  However, common sense tells us that bonds yielding less than 1%, as they did during the height of the pandemic, would fail to appreciate in any meaningful way no matter what happens to stocks.  And now that is proving to be prescient, which an article appearing on today is attesting to.   Click here to read the article

For the first time in my financial services career, bonds and stocks are falling in unison.  If this trend continues, 60/40 funds will serve as a tragic reminder that Wall Street always gets it wrong in times of crisis.  Record low yields, far below inflation, can't possibly serve as a means of diversification or protection during an equity bear market.  It is time to consider alternatives for diversification.

I believe investors need to STOP listening to Wall Street's advice and conduct their own correlation analysis.  Simply ask the question:  What is going up when the stock market is going down?  For example, history suggests hard commodities like gold and oil are a great means of diversification.  So in 2008, investors piled into these plays only to see them crash right alongside equities in late 2008.  Over the balance of the 2008 Financial Crisis, gold did much better than equities but equities have scorched gold since then.  Thus, gold didn't really serve as an effective hedge in 2008 and beyond.  In that bear market, bonds were the only true means of diversifying equities.  And correlation analysis illustrated that phenomenon.  

But every bear market is different and this bear market is certainly shaping up differently.  Too many investors have bought into the bond market diversification narrative.  And now it is proving to be a false narrative.  Some more progressive investors bought into the Bitcoin/crypto story but that is proving to be nothing more than science fiction.  

Currently, hard assets like oil, wheat and, to a lesser extent, gold are appreciating while equities and bonds are declining.  Correlation analysis such as we conduct on a fairly consistent basis has illustrated that hard assets have shown little correlation to equities over the past 12 months.  While the sample size is small, the correlation between hard assets and equities has actually turned negative thus far in '22.  So our thesis is that investors need to increasingly use these assets to achieve true diversification.   Fortunately for us, our positions in hard assets have served us well thus far resulting in high single-digit YTD gains while the aforementioned 60/40 funds are seeing double-digit declines.