Morgan Stanley suggests reevaluating traditional investment portfolios

Investors using the traditional 60% stocks and 40% bonds strategy should consider changing their approach, according to Jim Caron from Morgan Stanley Investment Management. He points out that the market has been very volatile this year. Factors include concerns about the U.S. economy and trade policies under the Trump administration. Historically, the 60/40 portfolio worked well because bonds and stocks often moved differently. But Caron notes that the correlation between these two assets is now at its highest in over a century. This means that when stocks go up or down, bonds are likely to do the same. "You should think of that as an active process," Caron said. He suggests that the ideal mix might vary, depending on the market. He warns that sticking to the traditional 60/40 mix could lead to lower returns. Over the last 40 years, this strategy provided an average return of about 7.5%. However, if bonds don’t appreciate much, the overall return could fall to around 5%. This would mean doubling your investment every 15 years instead of every 10 years with a higher return. Caron currently favors a slight adjustment to 55% stocks and 45% bonds. He favors an equal-weighted approach to the S&P 500 that prioritizes value stocks and mid-cap companies. Mega-cap tech stocks have declined recently, with the Nasdaq dropping about 12% since December. He is also optimistic about European stocks, seeing them as a value opportunity amid pro-growth policies. Caron believes Europe is undergoing a reindustrialization phase, which demands energy security. For fixed income, Caron uses a barbell strategy by mixing high-quality, short-duration bonds with some high-yield investments. He emphasizes safety by holding U.S. Treasuries and investment-grade corporate bonds while also including some bank loans and non-agency mortgage-backed securities.