Thought Leadership in Action

With inflation receding in recent months, financial advisers can help clients assess whether portfolio adjustments made during the peak inflation of 2021 and 2022 still make sense in a sub-5% inflation era. Advisers can help clients readjust their outlooks while retaining hedges for those clients concerned that inflation will remain elevated.

Reconsider the 60/40 Portfolio

Even investment strategies that have been traditionally reliable, such as the 60/40 portfolio, can raise concerns for some advisers and investors. This mix of stocks and bonds is known for balanced growth, but last year’s performance was unusually poor. Stocks were down by more than 10%, while bonds saw uncharacteristic fluctuations. This resulted in a year of underperformance that raises questions about the enduring relevance of this strategy.

However, history can be a good reminder not to dismiss longstanding and widely tested methods. The 60/40 portfolio’s strength is based on its capacity for resilience and steady growth over the long haul. With inflation in retreat, the 60/40 approach may once again shine as an avenue for moderate yet consistent gains.    

Look Anew at ETFs

            The investment landscape is never static, and one recent trend is the growing favor of exchange-traded funds (ETFs) over mutual funds. According to a Fidelity report, the average financial adviser’s model portfolio now allocates 26% to ETFs, up from 18% two years ago.

            Initially, a preference for passive strategies over active ones drove the trend, and it has now been further fueled by the emergence of actively managed ETFs, which cater to advisers seeking active strategies. The traditional benefits of ETFs—such as cost-effectiveness, tax efficiency and daily liquidity—have long been attractive to financial advisers.

            Consider discussing with clients how the benefits of ETFs can serve their individual portfolio strategies. This can be a great opportunity to highlight how ETFs allow for diversification and exposure to multiple asset classes while still being cost-effective and tax-efficient. Investors also can benefit from intraday trading provided by ETFs, letting them quickly and easily rebalance portfolios or move into different asset classes.

Keep an Eye on Emerging Markets

          The current landscape presents some compelling reasons for your clients to consider expanding investments beyond U.S. stocks to selectively include emerging markets (EM) stocks. EM stocks are trading at a favorable discount compared to their historical norms and developed market equities. With the Fed's aggressive tightening campaign winding down, the re-opening of China and fewer supply chain challenges, now could be an opportune time for investors to revisit their international exposure.

Institutional investors have been allocating more capital overseas, and ETFs targeting ex-U.S. markets have seen strong inflows this year. Additionally, the U.S. dollar has weakened in recent months, creating further support for international stocks.

The rebound of the world's second-largest economy, China, and easing of supply chain pressures likely will drive local consumption across Europe and Japan, which could be a major boon to developed market equities. Emerging-market countries have been ahead of the curve in tightening efforts, and inflation remains within the normal long-term range. This contrasts with the U.S., where the Fed is earlier in its tightening cycle and excess broad money creation has yet to be absorbed.

Emerging markets are trading close to price-to-book and price-to-earnings levels seen during the global financial crisis of 2008-2009. This suggests that EM stocks may offer an attractive entry point for investors looking for exposure to international markets. Now is a great time to talk with clients about opportunities in high-performing markets, such as South Korea, Taiwan and Brazil.