A short but necessary reflection on the “60/40 Portfolio”. (Hint for those wanting to move on to the weekend and stop reading here: the 60/40 portfolio is not dead.)
It would help first to define what a 60/40 portfolio is: an overall investment allocation of 60% stocks and 40% bonds (or bonds and cash). But even “stocks” and “bonds” can be too subjectively defined by the average investor. When it comes to a diversified 60/40 portfolio, the stocks category includes globally diversified equities of all sizes (large & small), styles (value & growth) and industries (all tech – not only super-AI tech – financials, energy, consumer goods, etc.). The bonds category can open a huge “can of worms” because a typical bond fund in a 401k account contains far riskier and longer-dated bonds than meant for the “steady, safe” portion of a retirement savings portfolio. Therefore, the bond category can do its best long-term work when invested in high quality, shorter-term bonds and cash instruments. Please ask me more about this topic.
Are you confused yet? That is the media’s intention. Approximately every year in recollection, going back to the 1990’s and earlier, the media, an analyst or research outlet claims “the death of the 60/40 portfolio”. But then, mostly due to efficient markets, the diversified 60/40 portfolio manages to grow and survive over the longer-term. The latest contradiction, within about one week, appeared in The Wall Street Journal and elsewhere claiming, first, the impending doom of the 60/40 portfolio and next a defense of the 60/40 portfolio.
A couple of questions to ask in this discussion:
- What is the definition of “death” of the 60/40 portfolio? It seems the media is defining one (1) down year as “death”. There were over ten (10) UP years for 60/40 portfolios following the 2008-2009 financial crisis through the historical highs of 2021. There were a couple of down years in the 2008 to 2021 timeframe, plus rebounds and then the BIG market correction (down) in 2022. So far in 2023, the 60/40 portfolio is far from dead – with short-term interest rates over 5% and diversified stocks flat-to-up. On balance, 60/40 portfolios have had positive returns, out-pacing inflation in the long-term, by observing the diversification mentioned above.
- What reasonable or informed investor believes a healthy portfolio cannot go down, and down a lot, in any one- to three-year period? How about 1987? How about the dot.com bust of 2000-2001? How about 2007-2009? How about 2015? 2018? For decades, investors who monitor their asset allocation and cash levels have been able to grow portfolios over the intermediate- and long-term despite painful short-term market downturns.
- Is this time different? This is the “million-dollar question” to which there is no real answer. With available current and historical market data, there are plenty of examples where situations looked or felt as if they could be “different” and then efficient stock and bond markets took over and markets adjusted and survived – and rebounded over time. Short-term periods in the market can be painful. That is why a calculated allocation to cash is key.
Timeframe is also key: 12- to 18-month and even 2- to 3-year investing timeframes may always have been too risky for the 60/40 portfolio. Return expectations in the short-term may need to be adjusted down, leading to long-term average returns on stocks possibly reverting to sub-10% levels, closer to levels seen before the extremes of recent years’ US Federal Reserve zero-percent interest rate policy.
Investing and saving is not an overnight process. The 60/40 portfolio, monitored periodically, can be one of the keys to long-term financial success.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.