A couple of days ago, I mentioned the 25/25/25/25 portfolio again.
The case for embracing an asset allocation strategy that’s radically different from the vaunted 60/40 split is pretty simple: The macro regime shifted in the 2020s, and when it did, the correlation assumption that underpinned 60/40 stopped working. As such, most manifestations of balanced stock-bond strategies suffered among their worst drawdowns on record.
Whether or not 60/40 is well and truly dead is a matter of (contentious) debate, but even it isn’t (dead), the idea of developed market government bonds as “riskless” assets which everywhere and always cushion equity selloffs surely is. Hence advocacy for some other split, whether it’s 25/25/25/25 or something else.
For what it’s worth, a 25/25/25/25 cash/commodity/equity/bond portfolio is performing well and generally has over time.
The figure above, from BofA, shows that as “radical” as that split might sound to investors suffering from acute recency bias vis-à-vis the negative stock-bond return correlation that defined the last 25 or so years, you’d have come out pretty well with some version of a cash/commodity/equity/bond blend over long holding periods.
Going forward, many believe the macro environment (where that includes socioeconomic shifts and geopolitical developments) will favor an equal-weighted portfolio spread across more assets.
“Domestic policies in the 2020s driven by solving inequality (fiscal excess, regulation, redistribution, reshoring) and international policies driven by isolationism (war, protectionism, barriers to free trade and capital flows), are inflation themes and favor cash and commodities relative to stocks and bonds,” BofA’s Michael Hartnett reiterated this week, noting that so far this decade, “$100 invested in 60/40 is now $121 versus $118” in what, considering last year’s acute bout of rates volatility, seems like a much less risky 25/25/25/25 cash/commodity/equity/bond portfolio.
If you ask Hartnett, the world of NIRP and disinflation is “fading into the distant past.”
I don’t believe that Harry Brown, when he conceived the 25/25/25/25 portfolio, ever imagined that the Federal Reserve would crush price discovery for over a decade. In the 80’s, when the Permanent Portfolio came out, QE wasn’t in the Fed’s vocabulary. Things have tilted so far, so fast, that I wouldn’t be surprised to see the Fed embark on YCC sometime in the future. That seems to take one of the four pillars out from under the 25/25/25/25 allocation.