Investing 2024: Turning the Page on the 60/40 Portfolio

For much of the past 15 years, the 60/40 portfolio of 60% U.S. stocks and 40% U.S. fixed income has been the foundation of portfolio construction, providing investors with exposure to the growing U.S. economy and to fixed income securities for protection during downturns.

Over the past two years, this portfolio strategy has broken down. Stock returns have been volatile and barely positive. When volatility sent investors looking for shelter, fixed income provided little refuge. In fact, the Bloomberg U.S. Aggregate Bond Index produced consecutive years of negative returns -- the first time in its history.

The culprit is inflation and the Federal Reserve’s interest rate hikes to combat rising prices. Inflation has been absent in the economic conversation for nearly 20 years, and investors have forgotten many of the lessons of the past. To understand what might lie ahead, investors need to assess both recent inflationary forces and historic trends.

“90% Risk”

The 60/40 portfolio currently faces several challenges, but market risk is perhaps the most significant. A 60/40 strategy may have 60% of the portfolio in equities, but that 60% represents closer to 80-85% of risk. In 2023, it was even worse. For the S&P 500, up 26.3% in 2023, the largest 7 stocks were 28% of the weight and fully 60% of the performance.