The Death of 60/40 - McElhenny Sheffield Capital Management

The death of 60/40:Diversifiers to Help Navigate the Decade Ahead

Build a high-performing, fortress portfolio to combat low future expected returns.

Recent outsized returns

For the past 13 years, our clients have been the beneficiaries of an incredible run for U.S. equities. The S&P 500 Total Return index finished 10 of the past 13 years above 11%! In fact, in an arguably tough economic environment over the last 3 years, the index has averaged over 26% per year.

Header	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
S&P 500 Total Return	16%	32.39%	13.69%	1.38%	11.96%	21.83%	-4.38%	31.49%	18.40%	28.71%

The traditional 60% stock and a 40% bond (60/40) portfolio has helped clients meet or exceed their financial goals over the past decade. While fixed income has not been a large driver of returns, it has served an important purpose. Using bonds as a diversifier helped to de-risk the portfolio and, in a falling rate environment, was additive to a portfolio returns. This has been the best of all worlds!

Interested in learning more?

Schedule a call with our experts

Schedule Now!

It's hard to believe but you could have done better...

Most advisors tweak the standard 60/40 portfolio to make it their own. This may include adjusting the asset class weighting, adding international, stocks, real estate, or commodities, or tilting factor exposures. Advisors use an endless number of combinations in the hopes of driving better performance; the same or better returns with less risk.

Notably, to lower the risk profile, advisors seek diversification across asset classes and geographies. Yet, a very easy but often overlooked diversification tool that can provide tremendous portfolio benefits is diversification across “investment strategy type.” We prefer tactical investment strategies for this type of diversification. Tactical strategies are those that do not keep the asset class weighting constant over time and can fluctuate from being 100% invested in equities to being 0% invested in equities (or fully defensive).

...by adding a tactical sleeve to your portfolio.

Traditional 60/40 Allocation

60/40 Allocation With 30% TPSR

Below is a comparison of a traditional 60/40 portfolio alongside a similar portfolio that adds a 30% allocation to our TPSR tactical strategy. Note that the TPSR allocation can come from the entire existing portfolio, not just the equity sleeve, because tactical strategies generally have risk profiles better than existing 60/40 portfolios; historically TPSR has reduced drawdowns and improved returns (more on this below).

All multi-year periods improved by adding an allocation to tactical

Growth of $100k since 2004

Periodic Total Returns

All risk metrics improved by adding an allocation to tactical.

60/40 Portfolio

Risk Info	3Y	5Y	10Y	15Y	All
Alpha	1.719	1.256	1.054	1.695	(1.769)
Beta	0.599	0.595	0.594	0.598	0.599
Volatility	11.94%	10.32%	8.58%	10.45%	9.67%
Sharpe Ratio	1.463	1.171	1.266	0.781	0.917
Sortino Ratio	1.162	1.036	1.271	0.796	0.940
Max Drawdown	20.99%	20.99%	20.99%	34.99%	34.99%

60/40 + Tactical Portfolio

Risk Info	3Y	5Y	10Y	15Y	All
Alpha	4.844	3.355	2.253	3.999	(0.615)
Beta	0.533	0.552	0.572	0.519	0.526
Volatility	10.55%	9.41%	8.18%	9.16%	8.70%
Sharpe Ratio	1.788	1.424	1.433	1.047	1.138
Sortino Ratio	1.692	1.530	1.750	1.273	1.408
Max Drawdown	16.68%	16.68%	16.68%	24.00%	24.00%

As you can see, every single risk metric above is improved. This creates a safer, higher returning portfolio. Unique diversifiers that can improve returns AND lessen risk are generally either very hard to find or too expensive to use in a portfolio for most clients…TPSR changes that for Advisors.

Shockingly Low Future Expected Returns

As an advisor, clients rarely heap praise on us for a great “last decade.” Instead, they care about the performance that will come over the next decade. Unfortunately, most major financial institutions are calling for much more subdued returns going forward. The surprising figures below are taken from the capital market assumptions of the constituent institutions. For context, the S&P 500 has averaged 16.34% since 2009.

Capital Market Assumptions by Institution - Forward-looking 10 Year Average Return

Institution	U.S. Equities	U.S. Aggregate Bonds
Vanguard¹	2.3%-4.3%	1.4%-2.4%
Blackrock²	6.7%	1.6%
BNY Mellon³	5.9%	1.2%
JP Morgan⁴	4.1%	2.8%
Research Affiliates⁵	4.3%	2.1%
Invesco⁶	7.0%	1.9%
Average	5.21%	1.92%

The unwritten presumption in these projections is that the next decade will include at least one big bear market. Think about it. To accomplish JP Morgan’s 4.1% projected annualized equity return, it is highly unlikely that the U.S. stock market returns 4.1% for each of the next 10 years. We will surely have years with great returns, years with ok returns, and years with terrible returns.

If these projections are remotely correct, helping clients reach their goals with a 60/40 portfolio will become significantly harder if not impossible. A tactical strategy, like TPSR, will likely help capture the gains of the great markets and sidestep the losses of the big bears.

We suggest that all clients add an allocation to TPSR to their portfolio mix. We want to make sure they are positioned correctly for the road ahead. Even if the prognosticators are wrong about future returns, our evidence suggests that using TPSR should enhance the risk-return profile of a portfolio.

TPSR is a low-fee, tactical ETF strategy that uses a rules-based investment approach to either be offensive or defensive depending on market conditions. This strategy has a live, audited, five-year track record that has produced strong returns with proven risk management measures.

Interested in learning more?

Schedule a call with our experts

Schedule Now!

¹ Market perspectives: December 2021 (vanguard.com)
² Capital Market Assumptions | BlackRock
³ Our 2022 Capital Market Assumptions | BNY Mellon Wealth Management
⁴ Long-Term Capital Market Assumptions | J.P. Morgan Asset Management (jpmorgan.com)
⁵ Asset Allocation Interactive (researchaffiliates.com)
⁶ invesco-capital-market-assumption-2022-usd.pdf

There is much more to learn

Our strategies are unique!

View Strategies

Important Disclosures

Privacy Notice

Website and Cookies Policy

contact

Address: 4701 W Lovers Lane, Dallas, TX, 75209

Phone: (214) 922-9200

This information is presented for illustrative purposes only. Past performance is not necessarily indicative of future performance. Investing involves risk and principal loss is possible.

McElhenny Sheffield Capital Management (MSCM) is a Registered Investment Adviser with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Important information pertaining to MSCM’s advisory operation, services, risks, and fees is set forth in MSCM’s current Form ADV Part 2A brochure, a copy of which is available upon request or at www.adviserinfo.sec.gov or www.mscm.net.

MSCM claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. MSCM has been independently verified for the period January 1, 2017 through December 31, 2024. The MSCM Trend Plus and Sector Rotation Composites have each had a performance examination for the periods January 1, 2017 through December 31, 2024. The Trend X Composite has had a performance examination for the period May 1, 2017 through December 31, 2024. The TPSR Composite has had a performance examination for the period April 1, 2018 through December 31, 2024. The verification and performance examination reports are available upon request by contacting info@mscm.net.

All strategy performance results, including investment characteristics, shown in the presentation are net of the MSCM Trend Plus, Sector Rotation, and TPSR strategies’ highest model fee of a 1% annual management fee, applied 1/12th of 1% (0.0833%) each month and net of the MSCM Trend X strategy’s highest model fee of a 2% annual management fee, applied 1/12th of 2% (0.1667%) each month, and for the Trend X strategy a 20% performance fee, applied quarterly to the net profits in the account and subject to a “high water mark.” The net of fee strategy performance results are calculated by MSCM by deducting the strategy’s highest model fee from the gross of fee performance returns. Index and strategy returns are inclusive of dividends and reflect total return (TR). Index returns are not net of advisory fees, the indices are not actively managed, and it is not possible to invest directly in the index. Fees and expenses vary based on custodial relationships, trading costs, management fees, and other factors. Individual client results could significantly differ from the performance results being presented. The performance of client accounts can be more volatile at times and may not be comparable to the performance of any index. The charts, graphs, and index information shown are presented for illustrative purposes and should not be relied on to predict future movements of the market or for guidance on when to invest. Nothing in this presentation is intended to be relied on as investment, legal, or tax advice. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation.

There can be no assurance that the strategy will be implemented as designed, or profitable, or that clients will not lose money. The tactical strategies use a variety of market indicators and stop levels that seek to identify upward or downward trends in the U.S. equity markets. If an indicator or stop level fails to detect significant downturns in the market, the strategy will continue to be exposed to underlying positions that could lose value during such downward periods. Similarly, if the indicators fail to timely identify a reversal of a downward trending market, the strategies will continue to be exposed to defensive exchange traded funds (“ETFs”) at a time when there is significant appreciation in the equity markets. Either scenario could result in the strategies underperforming other strategies that do not employ these strategies. There can be no guarantee the tactical strategies will correctly or timely identify the industries, sectors, or asset classes that will outperform during a given quarter or that the strategies will correctly or timely identify market trends. The tactical strategies invest in other investment companies and ETFs which result in higher and duplicative expenses. Investing in ETFs are subject to risks that the market price of the shares will trade at a discount to its net asset value (“NAV”), an active secondary trading market will not develop or be maintained, or trading will be halted by the exchange in which they trade. Brokerage commissions will reduce returns.

The Standard & Poor’s 500® Index (S&P 500 Index) includes 500 leading companies listed on U.S. stock exchanges. The Nasdaq Composite Index (Nasdaq Comp.) includes more than 3,000 stocks listed on the Nasdaq Stock Market and, along with the S&P 500 Index, is one of the most followed broad-based stock market indices in the U.S. The Benchmark 60/40 Index (Benchmark 60/40) is a blended index calculated by YCHARTS with a 60% allocation to the S&P 500 Index and a 40% allocation to the Bloomberg Aggregate U.S. Bond Index, a broad-based fixed income index considered to be representative of the U.S. fixed income market. The Benchmark 60/40 represents a traditional “balanced” investment allocation for a U.S. investor of 60% stocks and 40% bonds. Annualized volatility, a common measure of risk, is the standard deviation of monthly returns. Maximum Drawdown reflects maximum peak-to-trough decline in an investment, security, or index over a specific time period, as measured by the difference in the highest value during the time period and the subsequent lowest value during the time period. Alpha is the excess return of an investment relative to the return of a benchmark index. Beta is a measure of a security's or portfolio's systematic risk, indicating its volatility relative to the overall market (e.g., S&P 500 Index). R-squared is the proportion of a strategy’s price movements that can be explained by movements in a benchmark index. Sharpe Ratio measures the average return in excess of the risk-free rate per unit of volatility or total risk. Sortino Ratio is like Sharpe but focuses on downside risk. Treynor Ratio measures the return earned in excess of the risk-free rate per unit of systemic or market risk. Calmar Ratio evaluates the return of an investment over the risk of its maximum drawdown. A Chartered Financial Analyst (CFA®) charter is a designation given to those who have completed the CFA® Program and completed acceptable work experience requirements. The CFA Program is a three-part exam that tests the fundamentals of investment tools, valuing assets, portfolio management, and wealth planning. The Certified Financial Planner (CFP®) certification is a professional certification for financial planners conferred by the Certified Financial Planner Board of Standards. To receive authorization to use the designation, a candidate must meet education, examination, experience, and ethics requirements and pay an ongoing certification fee.

Website maintained by Talents Web Solutions

The death of 60/40:Diversifiers to Help Navigate the Decade Ahead

Build a high-performing, fortress portfolio to combat low future expected returns.

Recent outsized returns

Interested in learning more?

Schedule a call with our experts

It's hard to believe but you could have done better...

...by adding a tactical sleeve to your portfolio.

Traditional 60/40 Allocation

60/40 Allocation With 30% TPSR

Growth of $100k since 2004

Periodic Total Returns

Shockingly Low Future Expected Returns

Capital Market Assumptions by Institution - Forward-looking 10 Year Average Return

TPSR is a low-fee, tactical ETF strategy that uses a rules-based investment approach to either be offensive or defensive depending on market conditions. This strategy has a live, audited, five-year track record that has produced strong returns with proven risk management measures.

Interested in learning more?

Schedule a call with our experts

There is much more to learn

Our strategies are unique!

You are now leaving the website of

McElhenny Sheffield Capital Management