Learn the new math: 40/30/30

Given the uncertainty of the past few years, it’s difficult to predict where markets are headed. Volatile markets seem to be the new norm, and we at Picton Mahoney expect shorter, more volatile market cycles going forward.

The reasons for our macroeconomic view are complex, but the impact on investors is simple: find a new approach to managing your investment portfolio or become increasingly vulnerable to market volatility.

The New
Math

In a world of shorter, sharper market cycles, traditional investment approaches are under pressure. For decades, a traditional portfolio consisting of 60% stocks and 40% bonds was an effective, dependable model for diversifying risk and returns. But as market forces have caused stocks and bonds to move in tandem, the 60/40 model has become less reliable, forcing advisors to seek new approaches. Enter the 40/30/30 model of portfolio construction.

stocks

60

bonds

40

WHY
40/30/30

The 40/30/30 model involves taking 20% from stocks and 10% from bonds to create a third 30% portion. The new portion is then allocated to alternative investments, which aim to be less correlated to market movements in order to fortify investor portfolios for shorter, sharper market cycles.

Advisors play a key role by helping investors understand the new math and the reasoning behind it. More importantly, they play a critical role in selecting alternative investments for that new 30%, so it can serve as a ballast for investors amid volatile markets.

THE NEW

30

The next step is determining how to allocate the new 30% in a way that aligns with investor goals. What’s the key role that this new alternative ‘sleeve’ should play in an investor’s portfolio? Is the goal to enhance returns, or to diversify risk?

Enhancers

Strategies that target exposure to the same risks that are in traditional portfolios, but seek to deliver better outcomes. Enhancers tend to have a higher correlation and moderate-to-high beta to traditional assets. They aim to amplify the returns and/or mitigate the risks of investing in a traditional asset class, hence achieving better risk-adjusted returns.

Diversifiers

Strategies that are generally uncorrelated and have zero-to-low beta to traditional assets. They seek to provide returns in excess of cash without exposing investors to the risks of traditional assets, like stocks, bonds and cash.