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'Quick Takes' October 2023 - Soaring Interest Rates: Impact on Traditional 60/40 Asset Allocation, U.S. Pension Plans and more.

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In this issue of 'Quick Takes,' we observe continued soaring interest rates and their impact on the popular multi-decades-long asset allocation strategy known as the '60/40 portfolio'. 

(60% allocation to stocks and 40% allocation to bonds.) 

Many long-duration asset managers use the 60/40 strategy. What is a long-duration asset manager, you ask? A long-duration manager must pay a form of benefit (their liability) well into the future, measured in decades. These managers include Public Employee Pension Plans, insurance companies, foundations, and endowments, to name a few. (Duration is the official word for 'maturity' on Wall Street.)


Last year, 2022, interest rates rose the highest amount in the shortest time frame in history. This meteoric rise in interest rates put this traditional 60/40 strategy 'on its head,' which we will describe below. This move in interest rates is why we do not adhere to this asset allocation strategy during the most significant financial asset bubble of the past 100 years. As our regular reader knows, we use the asset allocation metaphor of 'Offense,' 'Defense,' and 'Special Teams' when describing how we allocate client assets in this 100-year asset bubble. The 60/40 strategy is primarily an 'offense' strategy, which we are not recommending during this 100-year asset bubble.