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When it comes to one classic investment portfolio, the future is grim, warn strategists at Morgan Stanley.
“We expect U.S. stocks and U.S. Treasurys to see [returns of] 4.9% and 2.8% each year, respectively, over the next decade, driving expected returns for a traditional 60/40 equity/bond USD portfolio close to a century low,” said a team of the bank’s strategists, including Serena Tang and Andrew Sheets, in a note to clients on Sunday.
That 60/40 carve-up refers to longstanding advice that says investors should balance their portfolios as follows: 60% parked in stocks to benefit from the historically higher returns for that asset class and 40% left in perceived lower-risk bonds.
Here’s the analysts’ chart that lays out that bleak 10-year view, which they blame on low growth, low inflation expectations and low yields versus history:
Morgan Stanley is not alone in urging investors to shake up their ideas of a perfect portfolio, which may be tough advice to swallow lately as U.S. stocks push further into record territory. Last month, Bank of America cautioned that with so many investors piling into bonds these days, to protect against an economic downturn and risk of a trade war, for one, a bubble may be forming that could pop and hurt the 60/40 crowd too.
“The return outlook over the next decade is sobering – investors face a lower and flatter frontier compared with prior decades, and especially compared with the 10 years post-[financial crisis], when risk asset prices were sustained by extraordinary monetary policies that are in the process of being unwound,” said Tang and Sheets.
As for where to go, they say Japanese and U.K. stocks are delivering better than their long-term averages. And when it comes to bonds, they say investors will need to rotate away from high-yield and government bonds, and into investment grade, which Morgan Stanley says is still “vital for returns and diversification over the long run”.
