Even the Classic 60/40 Investment Portfolio Is Getting Clobbered This Year
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One of the most trusted and popular investing strategies is failing in 2022.
A 60/40 portfolio — made up of 60% stocks and 40% bonds that's often a default recommendation, aiming to minimize risk while still enjoying growth — is down nearly 18% in 2022, the worst start to a year since at least 1976, according to an analysis from Bespoke Investment Group.
"A similar asset allocation has started the year down over 6% twice previously, in 2002 and 2008," strategists at Bespoke Investment Group wrote in a note to clients Thursday. "Nothing else comes close to the losses this year."
The strategy is popular because it can offer a mix of growth potential via the stocks and safety with the bonds. As Money previously reported, from 1926 to 2020, the 60/40 portfolio produced an annual return of 9.1%, according to investment giant Vanguard Group.
But today, someone with a 401(k) retirement plan that has a 60/40 allocation is not only dealing with 40-year high inflation and paying $5 per gallon at the gas pump, but also "the biggest shock to their retirement portfolios since the worst stretches of the Financial Crisis," the Bespoke strategists said.
Why is the 60/40 investment portfolio doing poorly?
Across the board, financial assets are suffering.
The S&P 500, an index commonly used to measure how stocks are doing overall, officially entered a bear market this week, meaning that its price has fallen 20% or more from its previous high. The bond market, meanwhile, continues to suffer, with U.S. Treasury yields (which move in the opposite direction of bond prices) climbing to their highest levels in a decade. Even bitcoin's price has plunged more than 60% from its high in November.
Financial markets soared following the March 2020 crash in the early days of the pandemic, pumped up by stimulus money from the government and near-zero interest rates. But the economic environment looks a lot different now. Inflation hasn't been this high in decades, and in an attempt to tamp down rising prices the Federal Reserve announced Wednesday that it's hiking interest rates by 0.75%, its largest increase since 1994. The Fed had already raised rates twice this year.
While raising rates is a tool for battling inflation, it also makes it harder for consumers and businesses to borrow and spend money, and it can hurt prices for financial assets like stocks. Investors are clearly worried about what the Fed's moves mean for their money.
Bond and stock prices don't always drop at the same time — in fact, the appeal of a diversified portfolio is that when one asset falls, another will hold steady. This happened in March of 2020 when Treasury bonds held their ground as stocks plunged.
When stocks crashed in 2008 and 2009, bonds "didn't drop very far or for very long," the note from Bespoke said. "This time around, though, it's a very different story."
Bonds have delivered -11.7% total returns this year, which they say is "adding to — and arguably causing — the collapse in equity prices rather than offsetting the stock bear market."
Should you have a 60/40 portfolio?
No allocation model is right for everyone, Artie Green, a financial planner with Cognizant Wealth Advisors in Los Altos, California told Money last year.
"Does everybody wear a size-10 shoe?" Green said. "If not, why would everybody use a 60/40 allocation for growing their savings?"
An investing plan should be tailored to an investor's specific risk tolerance, goals and time horizon, and there has been criticism that the 60/40 portfolio lacks customization and doesn't take into account assets outside of stocks and bonds. Investors also shouldn't settle on a 60/40 ratio in their portfolio and never look at it again; your allocations likely need to be adjusted as you get closer to retirement.
Still, this strategy could be a good starting pointing for investors, strategists at LPL Financial wrote in a note to clients this week.
While there may be opportunities for investors to consider greater diversification, Bespoke strategists say the classic 60/40 portfolio is "very much alive."
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