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UBS anticipates a return of the 60/40 portfolio and advises investors to reduce cash holdings



The 60/40 portfolio, consisting of 60% stocks and 40% bonds, has been shown to outperform cash over the long term, according to UBS. As interest rates continue to fall, the returns on cash are diminishing, causing investors to reconsider staying on the sidelines. Historically, a 60/40 portfolio of U.S. large-cap securities and bonds has beaten cash around 80% of the time over a five-year period, making it a viable investment strategy, Mark Haefele, chief investment officer for global wealth management at UBS, noted. This balanced portfolio helps to lower volatility, especially when stocks and bonds move in opposite directions.

Despite a tough market year in 2022, the 60/40 strategy showed resilience and bounced back in 2023. Leslie Falconio, head of taxable fixed-income strategy at UBS, explained that while the stock/bond correlation may have been dormant during market slumps, it is not dead and is expected to come back into play over the long term. UBS anticipates the Federal Reserve to cut interest rates, which will impact the yield curve and drive interest back into assets for capital preservation and liquidity rather than for high yields.

Moving forward, Falconio suggests the construction of a 60/40 portfolio may look different with the increasing popularity of alternative assets like private credit, which offer diversification and lower volatility. UBS advises maintaining strategic and diversified exposure throughout fixed income, particularly favoring high-quality bond segments. With compressed spreads in the market, Falconio emphasizes the importance of picking the right investments for relative value, such as investment-grade corporate bonds and Treasury inflation-protected securities.

Overall, UBS remains confident in the long-term success of the 60/40 portfolio, as it continues to be a reliable investment strategy during volatile market conditions. While cash may currently be attractive due to higher yields, UBS expects cash to revert to being used primarily for capital preservation and liquidity. In the end, a balanced portfolio with a mix of stocks, bonds, and alternative assets can help investors achieve their financial goals while navigating market uncertainties.

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