The Paradox of Diversification: The 60-40 Portfolio’s Future
Release Date: 06/11/2024
Raising the Stakes: Investing and the Art of Risk Taking
The Outthinking Investor
With a standard deck of cards, there are around 2.5 million potential hands at the start of each game of poker. The key to success is in the decision process—determining how to play a hand, and how much to bet, despite not knowing which cards are in another player’s hand. Like in poker, every investment decision includes at least some degree of uncertainty. What lessons can poker teach investors about sizing their bets, managing risk, and making better decisions for their portfolio? This episode of The Outthinking Investor delivers insights on the benefits of probabilistic...
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The New Arms Race: Supply Chains, Data, and National Security
The Outthinking Investor
The world’s superpowers are engaging in a different type of arms race beyond the battlefield. With technology advancing at a speedy pace, a global competition for all the ingredients necessary to support artificial intelligence—from data centers and semiconductors to the AI models themselves—is heating up. Not only do these ingredients form the building blocks of today’s economy, but building a secure and reliable flow of data is also considered a key national security objective. The UK designated data centers as critical national infrastructure in 2024, underlining how governments are...
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Against the Grain: Challenging Conventional Wisdom for Better Outcomes
The Outthinking Investor
Edward Lorenz, a meteorologist and mathematician, formulated a theory called the butterfly effect—based on a hypothetical scenario in which a butterfly, simply by flapping its wings, affects a tornado weeks later. The butterfly effect illustrates how small actions in complex systems can lead to big changes, underscoring the challenges in making forecasts. This is particularly relevant for investors. A complex global economy often takes unexpected turns, and macro disruptions and uncertainty present challenges for those navigating financial markets. But with this knowledge, investors could...
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Balancing Act: Economic Policy and National Security in a Fragmenting World
The Outthinking Investor
Italy surprised much of the world when it became the first—and only—member of the G7 to join China’s Belt and Road program in 2019. Just four years later, Italy withdrew from the initiative. The about-face served as a microcosm of the geopolitical landscape’s evolution. Policymakers have long viewed the economy through a geopolitical lens. But the overlap between the economy and national security has grown, increasingly becoming the focus of today’s geopolitical fractures amid global competition over trade, technology and defense. This episode of The Outthinking Investor explores the...
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Future-Proofing Portfolios: Taxes, Tariffs, & Government Spending
The Outthinking Investor
The use of economic statecraft is on the rise. With rivalries among major economies intensifying, countries are increasingly employing tariffs, sanctions and subsidies, contributing to a global realignment in trade flows. Meanwhile, elections in the US and Europe portend new debates over taxes, government spending, and the right fiscal formula to support growth and productivity. In the US, the 2017 Tax Cuts and Jobs Act’s tax reductions for individuals are due to expire in 2025, setting the stage for another round of changes to the tax code. Europe faces difficult budget choices amid calls...
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Global Elections in Focus: The Impact on Investors and the World Economy
The Outthinking Investor
The “year of democracy” holds the potential to bring profound change to global politics, economic policy, and the investment environment. By the end of 2024, more than five dozen countries, accounting for nearly half of the world’s population, will elect new leaders. Elections in Europe, including the UK, France, Germany and European Union, have already yielded both expected and surprising results. The US presidential election in November, as well as key congressional races, also could create significant policy changes—both expected and unexpected—during the next administration, no...
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Investing In Cities: Private Capital’s Growing Role In Urban Development
The Outthinking Investor
Cities have faced a host of challenges over the course of history, such as affordable housing, transportation, public safety and economic opportunities. In today’s rapidly changing global economy, these challenges are becoming increasingly complex, with cities needing to adapt to technological advancements, climate risks, and fluctuating fiscal policies. The most successful cities are dynamic and adapt to changing circumstances. Consider Pittsburgh, Pennsylvania, as a prime example. Once known for its manufacturing might, Pittsburgh had to reinvent itself after the collapse of the steel...
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Retirement at Risk: New Ideas for an Uncertain Future
The Outthinking Investor
In the middle of the Great Depression, President Franklin Roosevelt spearheaded the creation of Social Security, forever changing the US retirement system and how Americans think about long-term savings. Only a few pensions existed at the time, and Social Security was the first government-backed program to provide for the basic welfare of all seniors. The retirement landscape in the US—and around the world—has no doubt undergone massive change since the days of FDR. DC plans have significantly improved the retirement outlook, and an estimated 54.3% of American families now participate in...
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The Paradox of Diversification: The 60-40 Portfolio’s Future
The Outthinking Investor
Harry Markowitz, the legendary economist and father of modern portfolio theory, has been credited with saying that diversification is the only free lunch in investing. However, his work on the efficient frontier shows that investors give up expected returns to lower expected risk. This may make diversification even more compelling. With uncertainty becoming a prevailing theme in financial markets and the global economy, focusing on the benefits on diversification could prove valuable for investors. The 60-40 portfolio may have lost its luster in the broad market selloff of 2022, but allocating...
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A Pension Comeback? The Future of Retirement in a Higher-For-Longer Regime
The Outthinking Investor
Millions of college students across the US graduate each spring and enter the workforce. When today’s retirees entered the workforce in the early 1980s, pension plans and Social Security benefits were two of the main sources of retirement income. Just a couple decades later, defined benefit (DB) plans were overtaken by defined contribution (DC) plans such as 401(k)s, and an aging population was slowly depleting the Social Security Trust Fund. This was a massive shift in a relatively short period of time, and it forever changed one of the most important and challenging aspects of personal...
info_outlineHarry Markowitz, the legendary economist and father of modern portfolio theory, has been credited with saying that diversification is the only free lunch in investing. However, his work on the efficient frontier shows that investors give up expected returns to lower expected risk. This may make diversification even more compelling. With uncertainty becoming a prevailing theme in financial markets and the global economy, focusing on the benefits on diversification could prove valuable for investors. The 60-40 portfolio may have lost its luster in the broad market selloff of 2022, but allocating across a diverse mix of assets is crucial in the long run.
This episode of The Outthinking Investor dives into the topic of asset allocation and the role of stocks, bonds and alternatives in a diversified portfolio. Our guests are Antti Ilmanen, Global Co-Head of the Portfolio Solutions Group at AQR Capital Management and author of “Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least”; Scott Cederburg, associate professor of finance at the University of Arizona and co-author of a research paper titled “Status Quo: A Critical Assessment of Lifecycle Investment Advice”; and Lorne Johnson, Head of Multi-Asset Portfolio Design at PGIM Quantitative Solutions.
To hear more from PGIM, tune into our new podcast, Speaking of Alternatives, hosted by Eric Adler, President and CEO of PGIM Private Alternatives. Speaking of Alternatives is available on Spotify, Apple, Amazon Music, and other podcast platforms.