The 60/40 portfolio is a staple among savvy investors. Made up of 60% stocks and 40% bonds, it tends to deliver solid returns while attenuating risk. But after the 60/40 portfolio’s dismal 2022 returns, investors can’t be blamed if they’re having second thoughts about using this classic mix.
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For the last year, the 60/40 portfolio delivered a loss of 16.07%, after posting gains between 14.04% and 22.38% during the previous three years. The model produced a three-year string of losses starting in 2000, followed by profitable stretches of five years, nine years and three years. Since 2000, the 60/40 portfolio has posted six down years and 17 years with positive results.
The relevance of the classic mix is under debate, including discussions during the recent Morningstar Investment Conference in Chicago where one investment expert called the 60/40 strategy “bloodied” but said 2022 was a unique year where both bonds and stocks turned in losses. Other brokers, however, say the time and more diverse investments make the strategy old-fashioned and argued for the addition of alternative investments, especially in the bond portion of the mix.
Generally, the 60/40 portfolio is expected to provide diversification, because when stocks have been down, bonds have generally increased in value. That didn’t happen during 2022, largely because of high inflation created in the aftermath of the global Coronavirus pandemic. The resulting interest rate hikes by central bankers sent prices for bonds falling.
Taking the positive view that the 60/40 approach is still valid, said Todd Schlanger, a senior investment strategist at Vanguard. Schlanger told The Wall Street Journal that he expects the next 10 years will see the 60/40 portfolio continuing to work. He estimates that the annualized 10-year median return for a diversified 60/40 approach will come in at 5.4%.
Opposed to the 60/40 strategy is BlackRock, the world’s largest investment manager. According to a report from the firm’s research unit, the BlackRock Investment Institute, “A focus on any one asset allocation mix misses the point: A regime of higher volatility with sticky inflation needs a new approach to building tactical and structural portfolios.”
Why 60/40 Worked for So Long
The one trend that made the 60/40 portfolio successful for so long was the declining interest rates, according to Kernel Wealth CEO Dean Andersen, who noted that the Barclays Aggregate index has returned 7.75% annually. The result was that “[i]nvestors were able to receive 87% of the return they would have received if just investing in shares, but with 45% lower volatility,” Andersen wrote. With interest rates near 0% when inflation is subtracted, “The success of the 60/40 portfolio may have come to an end, with the basic math of the situation being unforgiving.”
So far this year, the 60/40 portfolio is up about 6% as of April, with some financial advisors saying the balanced mix still makes sense as a starting point for many investors, while other money managers point to the advent of alternative investments such as hedge funds, commodities, private equity and inflation-protected assets that can provide additional diversity beyond simply stocks and bonds.
“The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore,” Bob Rice, chief investment strategist for Tangent Capital, said at a recent Investment News conference. “It was convenient, it was easy and it’s over. We don’t trust stocks and bonds completely to do the job of providing income, growth, inflation protection and downside protection anymore.”
The Bottom Line
The 60/40 portfolio has been a strong investment strategy and benchmark going back to the 1960s but an abnormal decline in stocks and bonds during 2022 gave the strategy one of its worst results in years. Some advisers defend the long-term viability of the approach while others say it should be updated in the face of new, more flexible investment options that have emerged over the years.
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