The recent market turbulence has highlighted the importance of having a diversified portfolio, according to BlackRock. For many investors, that means looking beyond a traditional portfolio of 60% stocks and 40% fixed income, the firm said in a recent report. “Crucially, we believe investors can benefit from a more deliberate diversification strategy, where traditional asset classes may not meet the moment,” the team wrote. Equities fell on Wednesday after data showed the United States economy contracted in the first quarter, raising concerns about a possible recession. Treasury yields were flat. Yields move inversely to prices. The moves were just the latest in the market’s ups and downs as investors consider President Donald Trump’s trade policy and ensuing tariff negotiations. Expanding beyond a basic 60/40 makes sense because stocks and bonds haven’t had the negative correlation they once enjoyed — where bonds would provide a ballast if stocks tanked, said Gargi Chaudhuri, chief investment and portfolio strategist at BlackRock. Not only that, there has been an increasingly positive correlation, she said. For instance, earlier this month stocks sank and bond yields rose, particularly on the longer end of the curve, Chaudhuri pointed out. That’s led to a lot of clients asking, “what else?” she said. “[When] rethinking your 60/40, I think the starting place is important,” Chaudhuri said. “What type of portfolio you’re trying to build of that 60 — what part is in U.S. versus international,” she added. “Of the 40, what part is in something traditional like an [ iShares Core US Aggregate Bond ETF ] AGG versus more shorter-duration, income-seeking solutions.” Diversifying your portfolio There are several ways to diversify your portfolio to help hedge against volatility, Chaudhuri said. First, when looking at the fixed income portion, investors should concentrate on maturities in the 3- to 7-year range, she said. That allows them to focus on “the income of fixed income,” she added. For instance, the iShares Flexible Income Active ETF has an effective duration of around 3 years. BINC YTD mountain iShares Flexible Income Active ETF In addition, a small exposure to inflation-linked bonds in the front end of the curve could also help protect against inflation, Chaudhuri said. Within equities, investors should make sure they also have international allocations in addition to U.S. stocks, she said. The percentage depends on the investor, she noted, but said most advisors are underweight international. Then, investors can consider adding sleeves of diversifiers in their portfolios, like gold, which has had a tremendous run of late. “Maybe it won’t continue to go up at a straight line like it has, but certainly considering the diversifying properties, especially in a slowing growth, a rising inflationary world where you might want to reconsider the role of gold in a portfolio,” she said. Then there are what Chaudhuri calls liquid alternatives that are market-neutral strategies that have a lower correlation to the S & P 500 . “When equity markets are going down, they will not follow that same path. So looking at strong alpha generators that have a very low beta to the equity as well as the bond markets,” she said. These solutions can “significantly improve your portfolio outcomes by enhancing your performance … especially in a market down, but certainly in a market up scenario as well by utilizing different futures — basically long, short strategies across several sectors of the market, several parts of the capital stack in fixed income,” she added. BlackRock has three of these strategies that it said delivered better annualized returns and lower annualized risk compared to the benchmark aggregate bond index in the past three years. The BlackRock Global Equity Market Neutral Fund (BDMAX) focuses on diversification through equity long and shorts in an effort to deliver attractive returns that have a lower correlation to broad asset classes. The BlackRock Tactical Opportunities Fund (PCBAX) also seeks a lower correlation between stocks and bonds with a mix of equities, sovereign bonds and currencies. Lastly, the BlackRock Systematic Multi-Strategy Fund (BAMBX) focuses on total return that includes income and capital appreciation. BAMBX YTD mountain BlackRock Systematic Multi-Strategy Fund The funds don’t come cheap. The more accessible A-shares for the BlackRock Global Equity Market Neutral Fund have a 1.6% net expense ratio, while the BlackRock Tactical Opportunities Fund has a 1.09% and BlackRock Systematic Multi-Strategy Fund as a 1.2% net expense ratio. Still, diversifying beyond the 60/40 may not be for everyone, Chaudhuri said. “You could be an investor that’s just starting your investing journey … and you want a simple liquid, one ticker solution,” she said. In that case, something like the iShares Core 60/40 Balanced Allocation ETF (AOR) could work, she said. “They don’t want to be thinking about rebalancing,” she said. “It has your 60 and 40, and it’s balanced.” AOR .SPX YTD line iShares Core 60/40 Balanced Allocation ETF vs. S & P 500
