Core Insights - The article discusses the effectiveness and limitations of the traditional 60/40 asset allocation strategy, which consists of 60% equities and 40% bonds, highlighting its historical performance and potential future challenges [4][10][21]. Group 1: Historical Performance of 60/40 Portfolio - Since 1979, a 60/40 portfolio has delivered an annualized return of 10.2%, outpacing inflation by 6.8% [4]. - Over a 120-year period, the 60/40 portfolio has provided a real return of approximately 4.7%, which is sufficient for most investors' needs [5]. - There have been six periods, averaging 11 years each, where investors in a 60/40 portfolio either broke even relative to inflation or lost money in real terms, typically following strong return periods when valuations were high [6]. Group 2: Current Market Conditions - The recent performance of the 60/40 portfolio from early 2009 to the end of 2021 yielded about 9.4% real returns, driven by rising equity markets and declining interest rates [10]. - Current market conditions show that U.S. equities are trading at high valuations, while credit risk offers unsatisfactory yield pickups, suggesting potential disappointing medium-term returns for a 60/40 portfolio [10][21]. Group 3: Alternative Strategies - The article advocates for diversification and dynamic allocation strategies, such as GMO's Benchmark-Free Allocation Strategy, which seeks to enhance returns by avoiding expensive assets and capitalizing on undervalued opportunities [11][21]. - The Benchmark-Free strategy has historically acted as a helpful diversifier, providing better risk-adjusted returns compared to traditional portfolios [29]. - The strategy emphasizes a valuation-sensitive approach, dynamically allocating across multiple asset classes to navigate various market cycles [29][36]. Group 4: Investment Opportunities - The article identifies several compelling investment opportunities, including international deep value equities and Japan's small cap value stocks, which are seen as attractively priced due to structural changes and favorable valuations [22][23]. - The current environment presents a significant spread between value and growth stocks, creating opportunities for long/short strategies to benefit from narrowing valuations [24][35]. - The article highlights the importance of being willing to look different from traditional portfolios to capture these opportunities, especially in a market characterized by high valuations and significant changes [34][35].