The historic '60-40' rule of investing is finished for at least 10 years thanks to low bond returns, according to JPMorgan's $1.9 trillion asset management arm. Here's what to do instead.

• Leaders at JPMorgan's $1.9 trillion asset management arm say the guideline that portfolios should be about 60% stocks and 40% bonds has to be reconsidered because of ultra-low yields.
• While bonds can still help make a portfolio safer and more diversified, they say other options like safe haven currencies, infrastructure, and real estate can help fill the return gap.
• They add that there's no single replacement for the traditional formula, and all of the options that can supplement bonds come with notable tradeoffs.
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Almost everyone loves a good, simple rule that helps them deal with a complicated world. But sometimes the facts become overwhelming and the rule bites the dust.

JPMorgan Asset Management says that's now the case with the 60-40 rule of portfolio construction, a guideline that says investors should put about 60% of their money in stocks and the remainder in bonds.

The idea was that the stock-bond combination would perform well in good times and bad, and would deliver safety and steady income. But returns from bonds have been very low for a decade, and with negative yields and interest rates becoming prevalent around the world, leaders at the firm say that over the next 10-15 years, investors need to think about other options.

"The 60-40 stock-bond portfolio is going to give you protection, but it certainly isn't going to give you income from the fixed income component," said John Bilton, head of global multi-asset strategy. "We can no longer just say 'You know what, I'm going to buy US aggregate bonds and I'm going to buy global stocks, and I'm going to sit on it and go to the beach.'"

At an event outlining the $1.9 trillion company's long-term views on capital markets, Bilton said there's no single number to replace 60-40 or one asset that can take the place of bonds in the formula. That means investors have to think carefully about their situations and the pluses and minuses of numerous alternatives.

"That 40% component, I have to spend as much time thinking about the tradeoffs and the risk-rewards I'm making there as I do in the 60% component that is creating the bulk of my returns," Bilton said.

The options besides bonds

For example, Pulkit Sharma, head of alternatives investments strategy and solutions, notes that gold can provide some diversification because it tends to go up when stocks fall. Some investors will find that appealing, but the metal's price is volatile, and it doesn't generate income like bonds do.

He says high quality real estate and infrastructure assets will appeal to many investors because they offer strong, steady returns. That could include investments in real estate like office, industrial, or apartment buildings, or infrastructure like roads, water, and wastewater management facilities.

"They have really high forecastability of cash flows with very low margin of error," Sharma said. "They are a store of value. They also have stability of return outcomes, lower volatility. The trade-off is that they're less liquid."

Bilton agrees that will meet the needs of some investors.

"If I'm an investor who thinks 'you know what, I've got this regular cash flow demand but I don't need to have day to day liquidity ... core real estate could work really well for me,'" he said.

The US dollar is another traditionally safe asset, but Bilton says it may not function that way in the near future because it's already trading at a high valuation relative to other currencies. But he adds that the Swiss franc and Japanese yen could help will the gap.

"If you've got high liquidity demands, it may be actually that you think 'You know what, I'd be better off thinking about currencies here because at least I'm not taking the duration risk,'" he said. "If you still want the duration component, then you're probably looking at trading much more actively."

There's no definitive answer to handling those trade-offs. But since income, steadiness, and diversification are as important as ever, Chief Global Strategist David Kelly says experts and investors will have to look at the problem carefully and find the right approach.

"We have to reconfigure 60-40 thinking," he said. "We have to think about other ways of getting returns in the long run."