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Portfolio > Portfolio Construction

60/40 Portfolio Slump: Omen or Opportunity?

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What You Need to Know

  • The strategy has taken a blow this year as stocks and bonds both fell.
  • Equities and fixed income had traded in opposite directions for decades.
  • Market experts debate the outlook for the traditional balanced portfolio.

After rewarding long-term investors for decades, the traditional “60/40” portfolio — 60% stocks, 40% bonds — has stirred debate this year as both types of securities sank amid high inflation and aggressive Federal Reserve interest-rate hikes.

The popular strategy has come under more scrutiny recently given further market upheaval, with strategists noting the long-reliable structure may be in for a historically bad year. What’s unclear is whether this year’s drubbing signals a permanent change for the worse for the 60/40 portfolio or presents an unusually appealing investment opportunity.

Northman Trader founder Sven Henrich and Morningstar’s client solutions chief, Ben Johnson,  on Friday tweeted a Bank of America chart showing that, on a year-to-date annualized basis, the 60/40 portfolio was down more than 30%, which BofA called the worst annualized YTD return in 100 years.

Others made a similar point with different stats.

 “A 60/40 Portfolio of U.S. Stocks/Bonds is down 21.6% in 2022, on pace to become the 2nd worst year in history after 1931,” Charlie Bilello, Compound Capital Advisors founder and CEO, and others tweeted Sunday. 

Matt Brown, founder, CEO and chairman at CAIS Group, an alternative investment platform for financial advisors, last week declared the 60/40 balance “officially over,” suggesting to Yahoo Finance that portfolios need a 50/30/20 structure, with the 20% comprising alternatives. He’s far from alone among strategists who’ve recommended adding alternative investments to the stock-and-bond mix this year to potentially achieve higher returns.

Meanwhile, Ryan Detrick, Carson Group chief market strategist, took an optimistic stance in late September while noting in a tweet that the 60/40 portfolio was down nearly 21%. “The good news is there is still time and the best 3 months for stocks during a midterm year are coming up,” he added.

And early this month, retweeting Detrick, Roy Mattox, chief market strategist and portfolio manager for Integrated Financial Strategies, said:

“My takeaway is that 2022 will go down as the worst year ever for a 60/40 portfolio. Down 30% is not out of the conversation based on the math. On a favorable note, this bear market will set the stage for a tremendous, multi-year bull market run in both stocks and bonds.”

Christine Benz, Morningstar director of personal finance, said in an email Monday to ThinkAdvisor that “the 60/40 is a model of simplicity. … People disparaging it are often pushing some more costly and complicated agenda.”

At the same time, Benz called the 60/40 portfolio “a bit of a straw man” that investors shouldn’t automatically follow. “Most younger investors should hold well more than 60% of their portfolios in stocks, for example, whereas retirees — especially those who are older and plan to consume most of their portfolios — should probably hold less than 60% of their assets in equities.

“Custom-crafting an asset allocation that is appropriate given time horizon and risk tolerance is the way to go,” she added. “Moreover, the typical construct for a 60/40 portfolio is U.S.-centric, whereas holding non-U.S. stocks makes sense.”

It would be hard for the traditional stock-and-bond portfolio to have avoided a steep decline so far this year given widespread market volatility.

Stocks and bonds have tended to move in opposite directions for decades, offering investors protection, diversification and balance via the 60/40 structure. That’s not the case in 2022, when, as a Morningstar portfolio manager, Hong Cheng, noted in an article on the firm’s website last week, nothing has worked,” and they’ve both moved downward.

If the Fed lowers uncertainty surrounding inflation, stocks and bonds could resume their long-term negative correlation, according to Cheng. Even now, she added, Morningstar sees value in including bonds in portfolios, as the higher yields would help provide stability in a recession.

Morningstar quoted the Vanguard Group’s head of portfolio construction and chief Americas economist, Roger Aliaga-Diaz, as saying the 60/40, which many investors treat as a “basic passive portfolio,” is seeing one of its biggest drawdowns ever. The transition this year from a market environment with low bond yields and low inflation to one with high yields and high inflation has hit stocks and bonds alike, he noted.

Aliaga-Diaz also expects stocks and bonds to revert to a negative correlation after the market calms and the securities have a reset at lower prices, according to Morningstar.

Charles Schwab’s chief investment strategist, Liz Ann Sonders, however, suggested longer-term changes in the macroeconomic environment could spell a secular change for stocks and bonds.

She suggested in the Morningstar article that inflation will come down but to a higher level than the disinflation seen in the past 20-plus years, resulting in more volatility.


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