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As the economy adjusts to high interest rates and stubborn inflation, investing experts are once again asking: Does the tried-and-true 60/40 portfolio still make sense?
The debate over the popular strategy — which involves keeping 60% of your investments in stocks, for growth, and the remaining 40% in bonds, to protect against losses — is not new. For years, the investing world has battled over claims that the 60/40 portfolio is dead, with supporters saying "long live the 60/40 portfolio." In 2020, experts told Money that the strategy was antiquated and in 2022, when stock and bond prices were both falling, the 60/40 portfolio was clobbered.
One recent report from Bank of America said that evidence for the end of the 60/40 portfolio is “stronger than ever,” with strategists arguing that the decades-old model is “ill-prepared” for the macroeconomic shifts they expect over the coming years, like higher inflation, more interest rates and market volatility.
While the portfolio has staged a comeback alongside stock and bond prices, the question of whether you should stick with a trusted technique or try something new is still top of mind, especially now that we're dealing with a new bull market. We asked experts to weigh in on what economic conditions mean for the strategy going forward, and how investors should adjust their portfolios — if at all.
The 60/40 investing strategy is sticking around
When asked if the 60/40 strategy is still viable, Rob Williams, principal and managing director of research at Sage Advisory in Austin, Texas, responded, “Of course.”
He says that’s the case even after a brutal 2022, when U.S. stocks lost 18% of their value while long-term Treasury bonds plunged 31%, according to data analyzed by Bank of America. The plummet in prices came as a huge shock to many investors because historically, stocks and bonds have tended to move in opposite directions.
“That's why bonds are considered such a good hedge to your typical stock market holdings,” explains eToro U.S. analyst Callie Cox. When stocks are down, bond prices are generally up. Data analyzed by Cox shows that over the past 50 years, there have only been two instances in which both the S&P 500 and Treasury bonds posted losses over the course of the same year. One of those exceptions was 2022, where both assets fell because interest rates were so high, Cox says.
But one bad year doesn’t necessarily negate a time-tested strategy. Williams argues that the fundamental value of a 60/40 portfolio is diversification. The specifics of how that diversification looks might change, but the underlying principle isn’t going anywhere.
How to improve the 60/40 investment portfolio
The 60/40 strategy is only a rule of thumb and advisors say individual investors should feel comfortable tweaking it to fit their goals and risk tolerance.
“I actually think the 60/40 does a disservice to us, because people take it as a biblical truth within finance," Cox says. "There's a lot of gray amid the black and white."
Some people might be holding portfolios that are too conservative, while other should dial back on risk, she adds.
Williams says investors who want to optimize their 60/40 holdings can “move a couple of levers.” First, they can change the ratio of risky assets to less risky assets. While the 60/40 split covers “the largest group of people that are in the middle of the risk spectrum," he says "some people are younger and want 80/20." Others “want 20/80 the other way.”
Investors can also adjust their holdings within the 60/40 buckets, Williams says. They should be sure to include a diverse mix of equities within that 60% bucket, especially when it comes to small and mid-cap stocks. Investors can add international stocks, too. Within the bonds bucket, Williams said investors shouldn’t limit themselves to just one type of Treasury bond either. Diversification into emerging markets and non-government bonds, for example, will give investors a “wider opportunity set,” he says.
Rachelle Tubongbanua, a private wealth advisor managing director at U.S. Bank, agrees.
“While the 60/40 may be a good starting point for some investors, it may not be ideal for everyone," she says. There are always options outside of traditional stocks and bonds (like commodities, real assets like real estate or even hedge funds) for those who want more robust diversification.
What’s next for the 60/40 investment portfolio?
Williams says that would be a mistake.
“This would be the absolute worst time to abandon the 60/40,” he says. That’s because the outlook for fixed income is improving, and the Fed is likely nearing the end of its rate hikes. Bond yields tend to rise in the year or two after the end of a Fed cycle, Williams says. That means for the "40" portion of the 60/40 portfolio, “you're gonna get some combination of yield and price return over the next couple of years that's gonna be really good." That's not to mention the fact that many experts see stocks continuing to rise this year.
Tubongbanua says diversification is key to providing stability and growth in a portfolio when an investor has a long-term time horizon. Williams agrees: Over the long term, investors shouldn't abandon the core principle of diversification, he says.
Strategists at Morgan Stanley recently predicted a 10-year return of a little more than 6% per year for the classic 60/40 portfolio, despite all the persistent inflation and growing recession fears that could hurt stocks.
"While we do expect the 60/40 portfolio to deliver lower risk-adjusted returns compared with those over the last four decades, that doesn’t mean it is broken," the strategists wrote.
Tubongbanua recommends speaking with a financial advisor to help understand what portfolio adjustments might be right for you, especially during a time when markets are so turbulent.
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