- Morgan Stanley suggests that the 60⁄40 investment strategy could undergo changes due to the impact of conceptual AI, leading to increased efficiency and alterations in the stock/bond allocation and growth/inflation dynamics.
- The rapid adoption of technology can act as a supply shock in the short term, stimulating growth and often lowering prices.
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One of the recent areas influenced by conceptual AI is your investment portfolio.
Morgan Stanley indicates that the traditional 60⁄40 investment strategy, favored by conservative investors for decades, might be reshaped by the rise of AI.
Since the 1950s, this strategy, which involves allocating 60% to stocks and 40% to bonds, has been considered a fundamental principle in investing but is now facing scrutiny with the emergence of AI technology.
The potential increase in productivity through technology could disrupt the traditional relationship between stocks and bonds, as well as growth and inflation.
As per Morgan Stanley experts, the short-term impact of technology adoption resembles a supply shock, boosting growth and often reducing inflation.
With AI advancements potentially leading to favorable returns on both stocks and bonds, the previous assumption of a negative correlation between the two assets may no longer hold true, challenging the conventional risk diversification approach.
Analysts suggest that the once reliable ties between stocks and bonds may no longer serve as effective diversifiers, similar to the correlation shift witnessed during the dot-com boom in the 1990s.
The rapid advancement in information and communication technology during that era revolutionized investment strategies, reduced operational costs for companies, boosted efficiency, and expanded market reach.
Likewise, researchers highlight that AI, particularly conceptual AI, has the capacity to enhance productivity across various sectors.
Following a bond market upheaval leading to soaring Treasury yields, debates around the effectiveness of the 60⁄40 portfolio have intensified. The Federal Reserve’s aggressive interest rate hikes post-crisis aimed to curb escalating inflation, impacting the performance of the 60⁄40 allocation.
In response to the new interest rate environment, BlackRock has labeled the 60⁄40 portfolio as outdated, advocating for a more agile and detailed investment approach. Vanguard anticipates significant returns from the strategy in the upcoming year.
Morgan Stanley underscores that asset correlations could be influenced by multiple factors, including the implications of relational AI on economic growth and inflation.
In the long term, a shift towards a more stock-centric asset allocation may occur as fixed income loses its status as a reliable diversifier. Analysts speculate that investors may seek alternative diversification strategies, potentially exploring personal credit investments that show lower correlation with traditional equities and fixed income securities.
