- 60/40 asset allocation has merits in the long term but can be improved upon
- Market timing is hard but doesn't have to be perfect when safeguards exist
Diversification has long been touted as the only real free lunch for investors, but in 2022 the traditional 60/40 shares to bonds portfolio split was far from appetising. In the year to date to 25 November, the total return on the MSCI World index has been -14.7 per cent, a drawdown in step with the -16.4 per cent price decline sustained by 10-year US Treasury bonds in the same period.
British investors in either of these US-dollar denominated assets have been sheltered by currency gains, but a positive correlation between bedrock asset classes such as these undermines the premise of Modern Portfolio Theory, first set out 70 years ago by American economist Harry Markowitz. The breakdown of the defensive relationship that sheltered 60:40 investors so well in the past means any UK investor splitting capital between 10-year gilts (government bonds) and the FTSE All-Share index would have lost 5.4 per cent this year.