The Essence of Broken Asset Allocation... Will Next Year Be Different?

'Stocks 60 Bonds 40' Negative Returns
Impact of Simultaneous Decline in Stock and Bond Prices

[Asia Economy Reporter Junho Hwang] The traditional asset allocation strategy, known as the essence of asset allocation, the '60% stocks, 40% bonds' strategy, recorded the worst performance this year. This is the result of both stocks and bonds falling simultaneously due to interest rate hikes. The securities industry expects this situation to continue at least until the first half of next year.

According to Kiwoom Securities on the 16th, assuming an investment diversified with a 60:40 ratio of U.S. stocks and bonds at the beginning of this year, the return as of the closing price on October 25 was -19%. This figure is based on the Morningstar US Moderate Target Allocation NR Index, which invests 60% of assets in global stocks.

Comparing performance from the beginning of this year to September, the return of this index was -20%, which is not much different from the S&P 500 (-20%) and the MSCI World Index (-26%). During the 2020 COVID-19 pandemic, the return was about 8-9 percentage points higher, and during the 2011 Eurozone economic crisis, it provided about 7-10 percentage points of loss protection.

Bank of America (BofA) evaluated this by stating that "the 60/40 investment allocation portfolio is recording the worst performance in 100 years." Rick Rieder, Chief Investment Officer (CIO) of BlackRock, the world's largest asset management company, also said, "The 60/40 portfolio allocation no longer makes sense," advising that "it is necessary to change to 40% stocks and 60% bonds."

The domestic situation is no different. According to fund evaluator FnGuide, the return of mixed stock funds until October 25 this year was -11.59%. As of the 15th, the return was also recorded at -15.67%. Typically, stock funds allocate assets according to the 60/40 strategy.

The reason why the traditional asset allocation strategy no longer works is due to the increased correlation between stocks and bonds. When allocating assets through this strategy, even when stock returns are low, losses can be mitigated through bonds, which have a low correlation with stocks. However, due to this year's high-intensity tightening phase, both stock and bond prices fell simultaneously, diminishing the strategy's effectiveness.

Jinyoung Kim, a Global Exchange-Traded Fund (ETF) researcher at Kiwoom Securities, said, "The stock market this year already reflects the economic recession expected next year," and added, "The bond market has also priced in the U.S. terminal interest rate at the 4-5% range." He continued, "Volatility is expected to persist in the first half of next year when corporate profits are expected to be weak, but as interest rate hikes enter their final stage, the investment appeal of stocks and bonds is expected to expand."

This content was produced with the assistance of AI translation services.