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The 60/40 portfolio is historically one of the most popular investing strategies. But last year, this classic strategy — featuring an investing portfolio made up of 60% stocks and 40% bonds — got clobbered as both stocks and bonds suffered amid Fed rate hikes.
Some have gone so far as to speculate that the 60/40 strategy might be "dead" — basically meaning that investors were giving up on it.
But new data suggest the strategy is very much alive: A report from LPL Research predicts that the 60/40 is coming back, and will stay a viable investing strategy for the next decade and beyond.
What the data shows
With 60% of your money in stocks and 40% in bonds, the 60/40 strategy is a moderate risk portfolio — one that is risky enough to see some solid gains but which also keeps some fixed income for peace of mind.
In 2022, with inflation running wild and the Fed trying to stop it with interest rate hikes, the 60/40 saw some of its worst quarterly performances ever. The first three quarters of 2022 are among the five worst quarters ever for the 60/40.
The 60/40 strategy was left so vulnerable because the bonds, which are meant to act as a failsafe, were also hit hard. Typically, when stock prices are down, bond rates are up. That's why the 60/40 portfolio is a safe strategy. But, on top of the stock market experiencing high volatility, bonds were hampered by the fed's rising rates. Because bond rates often go down amid higher interest rates, both sides of a 60/40 portfolio were hit hard in 2022.
LPL Research’s report forecasts brighter days ahead for these portfolios, though, and investors should consider embracing the 60/40 once again. The shift appears to have already begun. In both the fourth quarter of 2022 and the first quarter of 2023, 60/40 portfolios saw returns of about 5%.
The LPL Research group posits that this method of investing will come back in vogue, thanks to the potential for both inflation and Fed rate hikes easing off. “There is still economic uncertainty ahead to work through, but we think some of the same factors that may support bonds (lower inflation, a steadier rate environment) may also provide a lift for stocks,” the report says.
60/40 investing portfolio: historical performance
Zooming out, researchers argue that the 60/40 has always been a viable investing strategy, even with 2022’s three awful quarters. A report from Vanguard shows that the 60/40 portfolio strategy saw a solid 6.1% annualized return from 2013 to 2022. Removing 2022's outlier figures, that annualized return shoots up to almost 9%.
Vanguard’s report additionally notes that asset classes have increased their value since 2022. The company has assessed the valuations of international stocks and bonds, as well as U.S. bonds, and has found these markets to be more fairly valued at the end of 2022. While it declares U.S. stocks overvalued still, it has brought the sector closer to fair value as compared to 2021.
This finding, Vanguard reports, means that the worst-case scenarios for 60/40 portfolios are much better than they were in the last year.
In other words, both groups of analysts think the 60/40 strategy now has lower risk and higher expected returns — and it's primed for a big comeback with investors.