BlackRock CEO Says the Typical 60/40 Portfolio May Not Work Anymore

The 60/40 portfolio is a traditional approach to investing that splits your money 60% to stocks and 40% to bonds or a fixed-income investment, which provides regular interest payments for more stability. While this method has worked for years, Larry Fink, BlackRock’s CEO, says it might be time to switch things up.

Contents

New Regime The Rise of Private Markets Breaking Down the Walls Don’t Underestimate Change Understand Your Risk-Taking Limits

In his annual letter to shareholders, the billionaire wrote the classic investment strategy “may no longer fully represent true diversification” and recommended a new way of allocating funds.

“The future standard portfolio may look more like 50/30/20,” he wrote, pointing to a logical mix of 50% stocks, 30% bonds and 20% to other investments such as real estate, private equity, infrastructure and private credit due to shifts in the world economy.

Post-pandemic inflated prices and trade policies are a couple of reasons why the 60/40 method is under scrutiny, per Fink, but there are two other main factors that BlackRock highlights in more detail. Here’s why the CEO suggests retiring the go-to approach in the near future.

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New Regime

In a recent blog post, BlackRock stated a “new regime” is partly to blame for the suggested move to a 50/30/20 portfolio. The last three years of higher interest rates and “market uncertainty” have made it difficult to invest for many in comparison to the last decade, the post stated.

The Rise of Private Markets

Private markets are just that — private — so individual investors often don’t have access to opportunities. With private markets significantly growing and bonds no longer the safe bet, Fink notes that it’s tougher for certain people to get in on the game.

“For individual investors, they often require higher minimum investments,” he stated in the letter. “And even when the minimums are lower, investing is often limited to people with a certain income or net worth.”

By including private assets in a portfolio, investors can potentially achieve higher returns and be better equipped to battle against inflation.

“The appeal is clear,” Fink wrote. “While these private assets may carry greater risk, they also provide great benefits.”

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Breaking Down the Walls

To break the barriers of only the ultra-rich having access to private markets, Fink wants to make space for others by having more transparency. Last year BlackRock acquired Preqin — a data firm tracking 190,000 private funds. The company seeks to create transparency by enabling indexed private-market investments akin to S&P 500 ETFs to have more accessibility.

In the letter Fink noted, “Preqin effectively does for private markets what Zillow did for housing,” making it easier to “buy” and “track” investments.

Don’t Underestimate Change

The 60/40 portfolio is what many experts deem a balanced way to invest. While it’s been the mainstay of investing for decades, Eric Mangold, founder of Argosy Wealth Management, reminds investors that change happens.

“The idea of the 60/40 was and is that stocks and bonds rarely go down at the same time,” he explained. “Now there are some portfolio recommendations that have an allocation to ‘alternative’ or ‘private-market’ investments to help boost returns and lower the volatility.”

He added, “When it comes to building your own portfolio, understand that things change.”

Understand Your Risk-Taking Limits

Investing is risky and it’s essential you learn what your limits are and what you’re able to live with in terms of loss. One year the 60/40 portfolio might be profitable and the next year it’s off. How long do you wait it out?

“It’s important to understand your own stomach for risk and what your goals are,” Mangold stated. “Then ask, ‘Are my investments aligned with my goals?’ Then keep on top of your portfolio and tweak as necessary.”

He explained, “Even if your portfolio has an off year, that doesn’t necessarily mean it’s time to blow the whole thing up. Perhaps a nip here and a tuck there will help you realign to your goals.”

The death of 60/40 isn’t imminent, but Fink isn’t waiting to see if a 50/30/20 mix will become the new gold standard of the industry. He’s already taking steps to move toward this new allocation strategy.

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