The first half of 2022 has not been kind to the classic 60/40 portfolio, but investment bank Morgan Stanley says there are still compelling reasons to consider this asset allocation. Part of the rationale for not dismissing this allocation has to do with how much less expensive equities have become lately; another part of the rationale has to do with how much more bonds in both the U.S. and Europe should deliver. Consider working with a financial advisor as you weigh various asset allocations against your goals, timeline and risk profile.
Bad News, Good News
In the first six months of 2022, the S&P 500 index had its steepest first-half plunge since 1988. The large-cap index dropped 17% from January to June as the broader market tumbled into bear market territory. That erased all of a 60/40 portfolio’s gains since September 2020. Soaring inflation, more than 9% in June, plus rising interest rates hammered bonds at the same time that equities went into a nosedive.
Andrew Sheets, the bank’s chief cross-asset strategist, said in a report that the 60/40 asset allocation offers higher estimated long-term returns in the U.S. and Europe over the next 10 years than at most points over the last decade. For one thing, fixed-income securities continue to effectively diversity a portfolio. Further, despite the positive correlation of bonds and stocks over during first half 2022, they should be remain negatively correlated in the future.
An Upbeat Outlook
The bank also hiked its estimates for the 60/40 portfolio, in both Europe and the U.S., over the next 10 years to 6.2% on higher yields and cheaper prices. That’s 3.9 percentage points above the projected average annual inflation rate.
For portfolio construction, that matters, as having 40% of a portfolio in anything with one-third the volatility of the other 60% will absolutely dampen overall fluctuations, Sheets said in his report. “Hence, despite recent struggles, the case for 60/40-type approaches endures, with higher estimated long-term returns in the U.S. and Europe over the next decade than at most points over the last 10 years.”
In fact, things may already be starting to turn around. From June 14 to July 25, the BMO Aggregate Bond Index ETF rose approximately 5%, and in the same period the SPDR S&P 500 ETF Trust climbed nearly 7%.
Bottom Line
Don’t dismiss the venerable 60/40 investment portfolio out of hand just because of how poorly it did in the first six months of 2022. That period was unique for several reasons, including the paradox of a weakening U.S. economy and falling unemployment. It was also unusual in that the Federal Reserve tightened interest rates as the gross domestic product dropped.
Investing Tips
- Selecting the right asset allocation for your individual needs can be difficult. That’s where the expertise and guidance of a financial advisor can be so valuable. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s no-cost asset allocation calculator to get a quick estimate of what ratio of equities to fixed-income securities is right for you.
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