Last year was a challenging one for the 60/40 portfolio—a traditional investment strategy that invests roughly 60% of your assets in stocks and 40% in bonds.
This strategy has been popular among investors for many years because, historically, it provides a good balance of risk and returns. When stocks do well, investors are rewarded, and when stocks do poorly, bonds help to offset the losses and stabilize the portfolio.
Unfortunately, 2022 was a rare year in which both stocks and bonds performed poorly due to various factors, including high inflation, low but rising interest rates, and economic uncertainty. This has sparked much debate as to whether the 60/40 portfolio is dead.
While no one can argue that 2022 was a difficult year for this investment approach, we don’t believe the 60/40 portfolio is dead. However, like most investment strategies, it continues to evolve as external factors change. If you’re curious about the future of the 60/40 portfolio, here are three factors to consider going forward.
60/40 Is Down but Likely Not Out
Some experts are arguing that times have changed, and the classic 60/40 portfolio is not built to handle this new economic environment. Meanwhile, others argue that one year of poor performance is no reason to abandon an otherwise sound investment strategy.
While no one knows for certain what the future holds, it’s wise to consider the present situation within the broader context of historical returns. For example, the 60/40 portfolio has generated an average annual return of 8.8% from 1926 through 2021, according to research from Vanguard. Though not every year has been positive, on average, performance has been strong long-term.
Meanwhile, performance for the 60/40 portfolio looks particularly strong over the last decade (except for 2022)—especially if the fixed income portion of the portfolio was heavily weighted to long-term U.S. bonds. Yet this type of outperformance isn’t typical, nor is it easy to predict. We believe a more diversified approach makes sense for the majority of investors over the long run.
In addition, Vanguard’s research shows that while the 60/40 portfolio is designed to be stable, it’s not unprecedented for stocks and bonds to be down simultaneously, at least for short periods. However, over the last 46 years, investors have never encountered a three-year span of losses in both asset classes. If history is a guide, that means it’s unlikely that the current environment persists long-term.
Near-Term Projections Have Improved
One silver lining to a challenging 2022 is that future projections are looking better in the short term.
As stock and bond prices have dropped, they’ve become cheaper to purchase. Yet their long-term outlook remains favorable, thus leaving more room for potential appreciation going forward.
As a result, many experts believe that the future of the 60/40 portfolio looks better than it did before 2022, at least in the near term.
A More Dynamic Approach May Make Sense for Many Investors
Indeed, the 60/40 portfolio’s risk profile and reward potential are appropriate for many investors. However, in most cases, a static 60/40 allocation isn’t appropriate over an investor’s lifespan.
For example, in a normal market environment, investors approaching retirement may want to consider shifting their portfolio towards a larger percentage of bonds to dampen volatility and limit losses. Others may want to allocate a portion of their assets to less traditional asset classes like real estate, commodities, and even private markets if liquidity isn’t an immediate concern
And in some cases, a more dynamic approach may be warranted. In other words, investors may benefit from capitalizing on market opportunities as they arise and minimizing near-term risks.
It’s worth noting that in these situations, outsourcing your investment strategy to a professional money manager may be advantageous. For example, at CornerCap, we monitor markets internally to determine when certain asset classes appear attractive compared to others.
Indeed, we recognized that bonds were overvalued compared to historical norms and were able to adjust our portfolio allocations accordingly. Meanwhile, when equities appear overpriced, we can increase our exposure to bonds and other non-correlated assets. By anticipating changing market dynamics, we help our clients avoid unnecessary risks and make the most of their investment dollars.
A Long-Term Financial Plan Can Help
For many investors, the 60/40 portfolio offers a good balance of risk and return, provides sufficient diversification, and is easy to manage. In the absence of a formal financial plan and investment strategy, taking this approach is likely to yield positive results over the long-term—even when considering short-term hiccups.
However, one of the most effective ways to ensure you meet your financial goals is to work with a trusted professional to develop a long-term financial plan. At CornerCap, we develop personalized investment plans for our clients based on their needs and objectives. And we proactively make changes as your goals and the world around us changes. To learn more about how we may be able to help, please contact us.