The Time Has Come to Evolve the Traditional Balanced Portfolio

Published: 09/03/2021


Investor Knowledge +  10 Minutes = New Thinking

Advancing and evolving is a constant for humanity. Whether it is technology, health or even social norms, things change – usually for the better. For example, in 1952 just two-thirds of families in the U.S. had a telephone and only one-third had a TV¹. Today, a small digital device in someone's pocket can communicate or stream content to and from anywhere in the world. 

When it comes to investing, the industry is constantly evolving as well. Whether it be through new investment solutions, platforms to invest or even ways advice is received, there is a constant evolution. There is however one part of investing that seems to have been at a standstill – "modern" portfolio theory.

Modern Portfolio Theory’s "60/40 portfolio" was also developed in 1952², however it has yet to materially evolve. If most other aspects of the investment industry are always evolving to serve investors better, why shouldn’t investment portfolios? 

The case for evolving the 60/40 portfolio

With this theme in mind, the Asset Allocation Team has created a 5-part series of papers that addresses the evolution in our approach to asset allocation. In the first paper, we discuss how the 60/40 portfolio has served investors well in the past, why evolution is needed now more than ever and the approach to asset allocation at TD Asset Management Inc. (TDAM).

Some of the key themes for why the 60/40 portfolio needs to evolve discussed in the first paper include: 

  • Return expectations have changed - Bond yields have been steadily falling over the years and have dropped to all-time lows. Lower fixed income return expectations combined with strong equity return expectations fundamentally alters what one can expect from a 60/40 portfolio.
  • Diversification dynamics have changed - A negative correlation between bonds and equities is a basic requirement for diversification, however, we believe the primary risk to the traditional 60/40 approach afforded by diversification is that the negative correlation may weaken going forward. 
  • The search for yield has altered the risk relationship - Because of low interest rates, investors have searched for yield in riskier areas of the market, such as high-yield or emerging market bonds. While these assets can play a role in a portfolio, compared to less risky bonds they are much more positively correlated with equities which reduces diversification benefits and offers less protection from volatility.

The future of the 60/40 portfolio

Investors continue to have the same needs as they did in 1952; to achieve the necessary returns to help meet their goals, with the smoothest journey possible. However, the modern world has changed and so has the return outlook for major asset classes and the relationship between them. Just as technology has evolved, new innovative techniques and asset classes have enabled an evolution in portfolio construction.  Innovative solutions can better align with client goals and provide higher returns, with improved risk mitigation. 

Be sure to look for our upcoming articles that include the new ways in which TDAM views and explores a more modern portfolio.

¹Pearson, Stephen. "The Year 1952." The People History. Web. 20 Dec. 2016.

²The Journal of Finance, Vol. 7, No. 1. (March, 1952) Portfolio Selection, Harry Markowitz

The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.

Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.

The TD Wealth Asset Allocation Committee (WAAC) is comprised of a diverse group of TD investment professionals. The WAAC’s mandate is to issue quarterly market outlooks which provide its concise view of the upcoming market situation for the next six to eighteen months. The WAAC’s guidance is not a guarantee of future results and actual market events may differ materially from those set out expressly or by implication in the WAAC’s quarterly market outlook. The WAAC market outlook is not a substitute for investment advice.

®The TD logo and other trademarks are the property of The Toronto-Dominion Bank or its subsidiaries.


TDAM Connections at a Glance:

You might also be interested in:

TDAM Talks Podcast

Thought Leadership

Market Commentaries