Long Live the 60/40 Portfolio
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Many pundits have declared the death of the 60/40 portfolio1 in recent years, reflecting the microscopic scrutiny of multi-asset strategies in 2022 amid jarring global events. The 60/40 portfolio promotes the potential for attractive risk-adjusted returns by investing in a mix of stocks and bonds. And in spite of the ongoing global challenges, my firm’s empirical research suggests that bonds should continue to play a supporting role in well-balanced portfolios.
From our perspective, the 60/40 portfolio – and diversification in general – is alive and well.
The death of the 60/40 portfolio?
Is the 60/40 portfolio dead, as many pundits have declared? The near-zero global interest rates in the decade following the great recession, and, more recently, the dreadful performance of both stocks and bonds in 2022, have been cited by some as the death knell of the 60/40 portfolio. This investment approach promotes the promise of attractive risk-adjusted returns by including a mix of 60% stocks and 40% bonds, offering diversification and risk factors thought to be uncorrelated.
Within a diversified portfolio, bonds offer relatively predictable coupon payments and a potential counterbalance and stability to equities and other risk assets. Bonds often rally when equities sell off, as shifting underlying risk factors tend to fuel so-called flight-to-safety capital flows into bonds. Empirically, industry participants often cite observed low or negative correlations between stocks and bonds as justification for a balanced portfolio.