With 6 months under our belt at CIBC we're settling into rhythms and establishing the new normal. Part of that new normal will include a weekly blog, which will consist of short takes on the markets, investing, personal finance, and life. Every week new articles, opinions, and ideas come across our desks, and this blog will represent some of the more interesting thoughts.

 

Pete:

Is 60/40 dead? This has been a recurring headline in dedicated financial publications as well as mainstream news. The 60/40 portfolio (60% equities, 40% fixed income) has been a staple of the personal finance world because of the long term and stable performance. The 60% allocation to equities provides a solid amount of growth while the 40% allocation to fixed income provides provides ballast when equity markets are challenged. Over the past 30 years we have seen these assets move in opposite direction whenever a shock hits the financial system.

 

This week, I watched the newest CIBC Smart Advice Event "Where In The World Are We?" featuring Carissa Lucreziano - Vice-President, Financial and Investment Advice, CIBC Bank, and Benjamin Tal - Deputy Chief Economist, CIBC Capital Markets. Benjamin had a particularly interesting take on what happened last year, and by extension why people have started asking "Is 60/40 dead?" His explanation was simply that inflation changes leads to stocks and fixed income moving together, while growth changes leades to stocks and fixed income moving in opposite directions. As I said above, for most of the last 30 years, we haven't had any significant inflation changes. Older readers might remember the 12%+ interest rates on mortgages in the 80s, which was the last major change in inflation in Canada. Pretty much every major change in the markets over the last 30 years has been a growth change (ie a change in what we expect growth to look like), and so pretty much every major change in the markets has moved stocks and fixed income in opposite directions. Until the last year. With inflation roaring back, stocks and fixed income have both moved in the same direction - down. 

 

Back to 60/40. Is it dead? Not in our opinion. Here's why:

1) Central banks have inflation targets and will do what they can to keep it within a steady band. The Bank of Canada aims for a 2% inflation target, within a band between 1% and 3%. They are going to keep trying to tame inflation to more reasonable levels. That being said, every analyst we've talked to expects higher inflation at least for the next 1-2 years, though not the 6%-8% we saw in 2022.

2) Individual investors need a balance of growth (60% equities) and reliability (40% fixed income). Each portion has a specific purpose especially in the context of retirements lasting 20 years or more. 

3) It helps keep investors in the market. This is more behavioural finance than investment need. Simply put having diversification makes it easier to tolerate valuation changes because even when equities and fixed income move in the same direction, they won't move by the same amount.

 

I'll finish with an article from JP Morgan on July 20th, 2022 - towards the bottom of the market in the year. Is the 60/40 dead? While it focuses on a 60/40 portfolio of US equities there are some very interesting points. "Since 1980, there have been nine instances in which the 60/40 fell more than 10% within a given year. Yet, investors who were patient with their portfolios were often rewarded with a rebound. In five of those years, returns still ended the year positive. In eight of the nine instances, returns the following calendar year were positive, with an average return of over 17%." With the interest rate hikes peaking and inflation starting to get under control, it seems that 60/40 is likely to show a lot of life.