The Stock Market Is Getting Scary. Here's What You Should Do
nytimes.com
nytimes.com
The advice seems trite. Discussing risks of American Exceptionalism receding, debt risks, and the market action around "Liberation Day", and then halfheartedly recommending a 60/40 doesn't really seem to be addressing the problem that the author is highlighting.
To be up front, I'm no fan of the "60/40". Considering this was the default allocation for decades, why not reassess? How about 65/35, or 50/50? Can you specify why 60/40 is the best choice? At this point 60/40 is just a regurgitated answer. 2020 was the year when even the traditional, risk averse participants were looking at other approaches, and 2022 was the year when everyone who didn't heed the obvious warnings were crushed when stock/bond correlations flipped. So we're at the point where we have 5 years of very mainstream discussions around this topic, and I just don't think it's right to offhandedly throw out 60/40 anymore like that.
This is part of what I do in my day-to-day, and I'll give two alternatives:
The first is "let's reassess 60/40 but not stray too far" which is what a lot of people feel comfortable doing. Starting with the concerns laid out in the article (which are indeed major grey swans), the first step is to perhaps step a bit away from the passive investing industrial complex. SP500 isn't "the market", it's a market cap weighted index of the largest companies. It's a positive reinforcing feedback loop (for many reasons), but it is fragile to concerns like international capital flows reversing (Liberation Day) and comes with concentration risk (in NVIDIA and tech ad companies currently).
The first move is to tweak the equity allocation. Add some small-cap value. Add some international exposure. It doesn't have to be much. Maybe 80% S&P, 10% international, 10% small cap value. That's an improvement. There are so many ways for the modern investor to tweak their equity exposure. There are countless low cost factor indexes and overlays (for example, I personally always have a tiny bit of systematic smallcap value/quality/momentum, which is perpetually latching on to cheap small names which are on sound financial footing and breaking out to the upside, and I always have a bit of Berkshire for Quality factor, because it work for me).
The second move for the "60/40 tweaker" is to broaden the assets just a bit. Add a bit of gold, add some TIPS (inflation protected bonds). Again, there are benefits to adding even a small amount of diversification away from the hugely concentrated stock/bond correlation risk that comes with a 60/40.
The second alternative is just to move on from the 60/40, because it isn't a great portfolio when holistic risk is taken into account (sometimes things that could have happened didn't happen but it's still something you should have been prepared for and benefit from preparing for even if you don't necessarily realize the games from it). The generic portfolio that I implement for today's world is an updated Harry Browne Permanent Portfolio (which was created when inflation and stagflationary risks were in the conversation), and then depending on investor preference, complexity and asset classes can be added/removed. The simplest form would essentially be the original Permanent Portfolio, which is stocks/bonds/gold/cash at an equal allocation. Bombproof and has performed surprisingly well through many market regimes. Next would be to do some of the tweaks laid out above, so the equity allocation is more well-rounded, and perhaps some TIPS/muni-bonds etc get added. Then a level up is to add CTA/trend following commodity exposure, which is quite synergistic and has strong academic backing (when stocks and bonds are both going down, trend following performs well. In true inflationary and stagflationary environments when commodities are rising, trend following performs well.) And then for those who want to bring the framework fully online and up to date, volatility harvesting and long vol tail protection is also included, as well as overlays that dynamically size exposure from nowcasting models. What I want to get across is just how accessible and low cost these things are now. Everything up to the vol trading can be done with low cost ETFs, and should an investor want to lever up a bit (common with these portfolios, ex: 50 percent equity, 50 percent bonds, 20 percent gold, 20 percent trend), all of this can be done with futures overlays extremely easily to fit the puzzle pieces together however you want.
Obviously the vast majority of investors are going to be in the camp that just takes a few steps away from 60/40, which is great. Of course, the above suggestions aren't necessarily going to outperform an SP500 slamming NVIDIA long in huge size, but the risk and return profile for many may be more palatable, and the path dependency considerations are obviously more comprehensive and robust. In my examples, only a levered permanent portfolio working on all cylinders clearly beats S&P - it's an excruciatingly hard thing to do so it's no wonder why most don't try, yet there is something to be gained from being able to dismiss articles like "the stock market is scary now", and there is nothing better than to be able to rebalance into cheap equities at the bottom of a sell-off when everyone else is panicking, because you are on another wavelength.