Goldman says the typical retirement portfolio is broken and more risky now

Published Sun, Apr 19 20202:50 PM EDT

(This story is for CNBC Pro subscribers only.) The traditional 60/40 portfolio of stocks and bonds hasn't performed this poorly since the financial crisis, and Goldman Sachs expects the standard retirement allocation to suffer further. A basic balanced retirement portfolio, 60% of which invests in the S & P 500 and the rest in the benchmark Treasurys, registered a double-digit loss in March amid the coronavirus crash, marking its sharpest drawdown since 2008, according to Goldman. The weakness followed a record year for the "60-40" rule, where both bonds and stocks rallied. "This drawdown was due to the severity of the growth shock from the coronavirus but also somewhat elevated valuations and bullish positioning," Christian Mueller-Glissmann, managing director of portfolio strategy and asset allocation at Goldman, said in a note. "With both bonds and equities expensive, we expect lower returns and larger and more frequent drawdowns for 60/40 portfolios ... And tail risk for equities and bonds has increased: balanced portfolios have become more risky," Mueller-Glissmann added. The Vanguard Balanced Index Fund , which mirrors that portfolio rule, lost more than 9% in March. At its coronavirus sell-off low, the fund fell more than 20% from its peak Feb. 19 value, only the fourth time since World War II that it drops 20% or greater from a record. The 60/40 approach is designed as a relatively safe, middle-of-the-road way of investing. It offers more exposure to stocks, which are higher yielding than bonds, while still having a buffer from low-risk fixed-income investments when things go south. However, bond yields have hit rock bottom, leaving far less room for prices to appreciate to mitigate the losses on the equity side. The 10-year Treasury yield plummeted to around 0.6% in part due to the Federal Reserve's unprecedented easing measures. Still, the rate has been hovering around just 2% in the past year. "At current low yields the majority of global bonds have become less effective hedges for equities. To buffer large equity losses from here, in most cases bond yields would need to turn deeply negative," Mueller-Glissmann said. With the coronavirus pandemic showing signs of stabilizing and stimulus measures being rolled out, stocks have bounced off their lows with the S & P 500 climbing more than 25% from its March 23 low. Still, Goldman said the uncertainties about the virus and the economy still persist, which could trigger selling again. "A deep profit recession, a large increase in defaults and unemployment, as well as a return of the virus, could weigh on expectations for the recovery," Mueller-Glissmann said. "In the near term, the risk of growth shocks remains elevated and bonds may not provide a good enough buffer for those."

A trader works on the floor of the New York Stock Exchange.

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(This story is for CNBC Pro subscribers only.)

The traditional 60/40 portfolio of stocks and bonds hasn't performed this poorly since the financial crisis, and Goldman Sachs expects the standard retirement allocation to suffer further.