How inflation, interest rate hikes affect the 60/40 portfolio
How a 60/40 portfolio strategy works
The strategy allocates 60% to stocks and 40% to bonds — a traditional portfolio that carries a moderate level of risk.
More generally, “60/40” is a shorthand for the broader theme of investment diversification. The thinking is: When stocks (the growth engine of a portfolio) do poorly, bonds serve as a ballast since they often don’t move in tandem.
The classic 60/40 mix encompasses U.S. stocks and investment-grade bonds (like U.S. Treasury bonds and high-quality corporate debt), said Amy Arnott, a portfolio strategist for Morningstar.
Market conditions have stressed the 60/40 mix
Until recently, the combination was tough to beat. Investors with a basic 60/40 mix got higher returns over every trailing three-year period from mid-2009 to December 2021, relative to those with more complex strategies, according to a recent analysis by Arnott.
Low interest rates and below-average inflation buoyed stocks and bonds. But market conditions have fundamentally changed: Interest rates are rising and inflation is at a 40-year high.
U.S. stocks have responded by plunging into a bear market, while bonds have also sunk to a degree unseen in many years.
As a result, the 60/40 portfolio is struggling: It was down 17.6% this year through June 22, according to Arnott.
If it holds, that performance would rank only behind two Depression-era downturns, in 1931 and 1937, that saw losses topping 20%, according to an analysis of historical annual 60/40 returns by Ben Carlson, the director of institutional asset management at Ritholtz Wealth Management.
‘There’s still no better alternative’
Of course, the year isn’t over yet; and it’s impossible to predict if (and how) things will get better or worse from here.
And the list of other good options is slim, at a time when most asset classes are getting hammered, according to financial advisors.
If you’re in cash right now, you’re losing 8.5% a year.
Jeffrey Levine
chief planning officer at Buckingham Wealth Partners
“Fine, so you think the 60/40 portfolio is dead,” said Jeffrey Levine, a CFP and chief planning officer at Buckingham Wealth Partners. “If you’re a long-term investor, what else are you going to do with your money?
“If you’re in cash right now, you’re losing 8.5% a year,” he added.
“There’s still no better alternative,” said Levine, who’s based in St. Louis. “When you’re faced with a list of inconvenient options, you choose the least inconvenient ones.”
Investors may need to recalibrate their approach
While the 60/40 portfolio may not be obsolete, investors may need to recalibrate their approach, according to experts.
“It’s not just the 60/40, but what’s in the 60/40” that’s also important, Levine said.
But first, investors ought to revisit their overall asset allocation. Maybe 60/40 — a middle-of-the-road, not overly conservative or aggressive strategy — isn’t right for you.
Determining the right one depends on many factors that toggle between the emotional and the mathematical, such as your…
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