The 60/40 portfolio has historically been one of the most popular investment strategies. But last year, this classic strategy — consisting of an investment portfolio made up of 60% stocks and 40% bonds — clobbered as both stocks and bonds suffered amid Fed rate hikes.
Some have gone so far as to speculate that the 60/40 strategy may be “dead” – basically meaning investors are giving up on it.
But new data suggests the strategy is very much alive: A report from LPL Research predicts that 60/40 returns will remain a viable investment strategy for the next decade and beyond.
What the data shows
With 60% of your money in stocks and 40% in bonds, the 60/40 strategy is a medium-risk portfolio — one that’s risky enough to see some solid gains but that also keeps some fixed income for peace of mind.
In 2022, with inflation running wild and the Fed trying to stem it by raising interest rates, 60/40 saw its worst quarterly performance. The first three quarters of 2022 are among the five worst quarters for 60/40.
The 60/40 strategy became so vulnerable because bonds, which are meant to act as a fail safe, were also hit hard. Generally, when stock prices are low, bond rates go up. So 60/40 portfolio is a safe strategy. But, on top of the stock market facing high volatility, bonds were hampered by the Fed’s rising rates. Because bond yields often fall amid high interest rates, both sides of the 60/40 portfolio were hit hard in 2022.
LPL Research’s report predicts brighter days ahead for these portfolios, though, and investors should consider adopting the 60/40 again. The transfer seems to have already begun. In both the fourth quarter of 2022 and the first quarter of 2023, the 60/40 portfolio saw returns of around 5%.
LPL Research Group claims that this method of investing will become popular again, given the potential for both inflation and Fed rate hikes. “There is still economic uncertainty ahead to work through, but we think some of the same factors that can support bonds (low inflation, a stable rate environment) could provide a lift for stocks,” the report said.
60/40 Investment Portfolio: Historical Performance
Zooming out, the researchers argue that 60/40 is still a viable investment strategy, even in the three dire quarters of 2022. A report from Vanguard shows that the 60/40 portfolio strategy saw a solid 6.1% annualized return from 2013 to 2022. Excluding the figures beyond 2022, the annualized return reaches about 9%.
Vanguard’s report also noted that asset classes have increased in value since 2022. The agency assessed international stocks and bonds as well as US bonds and found these markets to be more fairly valued at the end of 2022. While this declares US stocks still overvalued, it brings the sector closer to fair value than in 2021.
This finding, Vanguard reports, means the worst-case scenario for the 60/40 portfolio is much better than it was last year.
In other words, both groups of analysts feel that the 60/40 strategy now has low risk and high expected returns — and is primed for a big comeback with investors.
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