What You Need to Know
- Even with its recent drubbing, the allocation’s longer-term performance isn’t far off trends.
- While bonds have dragged down returns, it’s easier for them to pull their weight now that interest rates have moved higher.
- Stock-bond diversification typically recovers within months, and investors haven’t encountered a three-year span of losses in both asset classes since 1976.
The traditional 60% stock-40% bond balanced portfolio may be down, but investors shouldn’t necessarily count it out, according to Vanguard investment strategists.
“What we would say is the 60/40 portfolio is not dead, it’s simply readjusting at this point,” Matthew Sheridan, senior investment consultant at Vanguard, said on a webcast Tuesday.
In fact, he added, prospects for the 60/40 portfolio are better now than they were two years ago.
Much of that inflation was unexpected, and unexpected inflation is the Achilles’ heel of the 60/40 portfolio, he explained.
Ed Saracino, senior portfolio specialist, strategy and development at Vanguard, noted the environment has been stressful for both equities and fixed income, an uncommon situation, with fixed income experiencing the most stressful conditions in 40 years.
Despite the stresses, inflation is being priced into holdings, Sheridan said, and “you suddenly are in a position when the traditional 60/40 portfolio actually looks attractive going forward.”
Financial advisors can explain that it’s rare for stocks and bonds both to be negative for a six-month stretch. The condition “feels bad right now and it’s understandable,” but based on data covering 50 years, it’s very unlikely that the 60/40 portfolio will be negative in three years, Sheridan said.
“Our patience is being tested,” but investors need to be patient, he added.
Stock-bond diversification typically recovers within months, and investors haven’t encountered a three-year span of losses in both asset classes since 1976, according to Vanguard.