For many years, a large percentage of financial planners and stockbrokers crafted portfolios for their clients that were composed of 60% equities and 40% bonds or other fixed-income offerings. And these so-called balanced portfolios did rather well throughout the 80s and 90s.
But, a series of bear markets that started in 2000 coupled with historically low-interest rates have eroded the popularity of this basic approach to investing. Some experts are now saying that a well-diversified portfolio must include more asset classes than just stocks and bonds. As we'll see below, these experts feel that a much broader approach must now be taken in order to achieve sustainable long-term growth.
Key Takeaways
- Once a mainstay of savvy investors, the 60/40 balanced portfolio no longer appears to be keeping up with today's market environment.
- Instead of allocating 60% broadly to stocks and 40% to bonds, many professionals now advocate for different weights and diversifying into even greater asset classes.
- In particular, alternative investments such as hedge funds, commodities, and private equity, as well as inflation-protected assets are some new additions to the well-rounded portfolio.
Changing Markets
Bob Rice, the Chief Investment Strategist for boutique investment bank Tangent Capital, spoke at the fifth annual Investment News conference for alternative investments. There, he predicted that a 60/40 portfolio was only projected to grow by a rate of 2.2% per year into the future and that those who wished to become adequately diversified will need to explore other alternatives such as private equity, venture capital, hedge funds, timber, collectibles, and precious metals.
Rice listed several reasons why the traditional 60/40 mix that had worked in past few decades seemed to under-perform: due to high equity valuations; monetary policies that have never previously been used; increased risks in bond funds; and low prices in the commodities markets. Another factor has been the explosion of digital technology that has substantially impacted the growth and operation of industries and economies.
“You cannot invest in one future anymore; you have to invest in multiple futures,” Rice said. “The things that drove 60/40 portfolios to work are broken. The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore. It was convenient, it was easy, and it's over. We don't trust stocks and bonds completely to do the job of providing income, growth, inflation protection, and downside protection anymore.”
Rice went on to cite the endowment fund of Yale University as a prime example of how traditional stocks and bonds were no longer adequate to produce material growth with manageable risk. This fund currently has only 5% of its portfolio allocated to stocks and 6% in mainstream bonds of any kind, and the other 89% is allocated in other alternative sectors and asset classes. While the allocation of a single portfolio cannot,of course, be used to make broad-based predictions, the fact that this is the lowest allocation to stocks and bonds in the fund’s history is significant.
Rice also encouraged advisors to look at a different set of alternative offerings in lieu of bonds, such asmaster limited partnerships, royalties, debt instruments fromemerging markets, and long/short debt and equity funds. Of course, financial advisors would need to put their small and mid-sized clients into these asset classes through mutual funds orexchange-traded funds (ETFs)to stay in compliance and manage risk effectively. But the growing number of professionally or passively-managed instruments that can provide diversification in these areas is making this approach increasingly feasible for clients of any size.
Alternative Portfolios
Alex Shahidi, JD, CIMA,CFA,CFP, CLU, ChFC– Managing Director and Co-Chief Investment Officer at Evoke Advisors–published a paperfor the IMCA Investment and Wealth Management magazine in 2012. In this paper, Shahidi outlined the shortcomings of the 60/40 mix and how it has not historically performed well in certain economic environments. Shahidi states that this mix is almost exactly as risky as a portfolio composed entirely of equities, using historical return data going back to 1926.
Shahidi also creates an alternative portfolio composed of roughly 30%Treasury bonds, 30%Treasury inflation-protected securities (TIPS), 20% equities and 20% commodities and shows that this portfolio would yield almost exactly the same returns over time but with far less volatility. He illustrates using tables and graphs, exactly how his “e-balanced” portfolio does well in several economic cycles where the traditional mix performs poorly. This is because TIPS and commodities tend to outperform during periods ofrising inflation. And two out of the four classes in his portfolio will perform well in each of the four economic cycles of expansion, peak, contraction, and trough, which is why his portfolio can deliver competitive returns with substantially lower volatility.
The Bottom Line
The 60/40 mix of stocks and bonds have yielded superior returns in some markets but has some limitations as well. The turbulence in the markets over the past few decades has led a growing number of researchers and money managers to recommend a broader allocation of assets to achieve long-term growth with a reasonable level of risk.
FAQs
Key Takeaways. Once a mainstay of savvy investors, the 60/40 balanced portfolio no longer appears to be keeping up with today's market environment. Instead of allocating 60% broadly to stocks and 40% to bonds, many professionals now advocate for different weights and diversifying into even greater asset classes.
What is the downside of a 60/40 portfolio? ›
Inflation is the biggest risk to a 60/40 portfolio because it can trigger central bank tightening which pushes up real rates, which weighs both on equities and bonds.
Why is the 40-60 balanced portfolio being challenged? ›
This diversification dynamic has been challenged by present market conditions. Stocks and bonds tend to bear a low or negative correlation during low inflation periods. In 2022, inflation and rising interest rates turned this relationship on its head and the 60/40 portfolio had its worst year since at least 1937.
Is the 60/40 portfolio dead? ›
Here's Why. After a disastrous 2022, it turned out not to be dead after all. The dual bear market for both stocks and bonds in 2022 created the perfect storm for the 60/40 portfolio, which had been a popular asset-allocation strategy for the past couple of decades.
What is the average return on a 60/40 portfolio? ›
As a result, 60/40 returned 17.2%, far above its historical annual median return of +7.8%. In 2022, central banks raised interest rates to tame the highest inflation rate in 40 years amid the tightest labor market in 50 years. This was the most aggressive rate-hiking cycle since the Paul Volcker era in the early 1980s.
Is 60/40 too conservative? ›
The traditional 60/40 investment portfolio may be too conservative, according to some financial experts, but the allocation can be a helpful guidepost.
At what age should you have a 60 40 portfolio? ›
You can consider investing heavily in stocks if you're younger than 50 and saving for retirement. You have plenty of years until you retire and can ride out any current market turbulence. As you reach your 50s, consider allocating 60% of your portfolio to stocks and 40% to bonds.
Can the 60/40 portfolio win in 2024? ›
Kephart: Sure. It's kind of your standard-bearer portfolio for someone with a moderate risk tolerance. 60% stocks/40% bonds gives you about half the volatility you're going to get from the stock market but tends to give you really good returns over the long term.
What is a 70/30 portfolio? ›
This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, fixed income asset classes with a target allocation of 70% equities and 30% fixed income.
How often should you rebalance a 60 40 portfolio? ›
A portfolio is rebalanced at regular intervals, such as annually or quarterly, irrespective of asset price movements. Threshold or price-based rebalancing. A limit is set on how far the portfolio can deviate from your desired target mix, such as a 60/40 stocks-to-bonds mix.
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
Is 60/40 good for retirement? ›
In the investing world, there is often little consensus on the best investments and the superior way to structure a portfolio. However, for many years, most financial advisors and industry experts have recommended dedicating assets in retirement accounts to 60% equities and 40% bonds.
Is a 60 40 portfolio better than cash? ›
Using data from 1990 to 2023, Vanguard looked at the returns of cash versus a standard 60:40 portfolio (60% stocks and 40% bonds). Their analysis shows that, over 6-month time frames, there is a 66% chance that a 60:40 portfolio beats cash. Over 12 months, there is a 69% chance.
What was the worst decade for the stock market? ›
The 1970s was one of the worst decades ever for investors but it was a wonderful time to be a saver. You had an entire decade of volatility to put money to work at lower prices followed by one of the greatest 2-decade bull markets of all-time. The 1930s were a similar story.
Is the 60/40 rule still valid? ›
While many analysts and experts predicted the demise of the 60/40 rule at the close of 2022 — a particularly brutal year for both stocks and bonds — this long-term investment strategy is looking favorable once again in 2024 and beyond.
Is 60% stocks and 40% bonds a good mix? ›
The 60/40 portfolio is the standard-bearer for investors with a moderate risk tolerance. It gives you about half the volatility of the stock market but tends to provide good returns over the long term. For the past 20 years, it's been a great portfolio for investors to stick with.
What is the 6040 rule? ›
But, the most successful entrepreneurs practice the 60/40 rule in every interaction. The rule is simple — in any conversation, as the person who is conceptualizing, developing, selling or optimizing an idea, you should listen at least 60% of the time; and talk no more than 40% of the time.
What is the 60 40 rule for retirement? ›
The 60/40 rule dictates 60% of the portfolio is invested in stocks and 40% in bonds or other “safe” classes. Comparatively, some financial services firms, such as Bank of America BAC, have said the 60/40 rule is essentially dead.
Will stocks or bonds do better in 2024? ›
Bond outlooks improve, but stocks' prospects drop on the heels of 2023′s rally. Better things lie ahead for bonds, but the prospects for stocks, especially U.S. equities, are less rosy.
