Naysayers Were Wrong About 60/40 Portfolios – Here’s Why

Why
Were
People
Worried
About
60/40?

Heading
into
2023,
there
were
legitimate
reasons
to
worry
about
the
prospects
for
balanced
portfolios.
Geopolitical
tensions
were
running
high
with
the
ongoing
war
in
Ukraine
and
tense
relations
between
the
West
and
China.

On
the
heels
of
an
abrupt
economic
slowdown
in
China,
many
forecasters
were
predicting
recessions
in
Canada,
the
US
and
Europe.
On
the
bond
side,
inflation
remained
high,
making
it
more
likely
that
central
banks
would
continue
raising
rates.

Some
of
these
events
materialised,
but
the
year
turned
out
to
be
pretty
decent
as
a
whole.
On
the
equity
side,

the
“Magnificent
Seven”
racked
up
gains
ranging
from
50%
to
240%.

These
double-digit
gains
powered
broad
market
indexes
to
more
than
a
26%
gain
for
the
year.
Bond
returns
weren’t
bad,
either:
the
Morningstar
US
Core
Bond
index
finished
the
year
with
a
5.3%
gain,
as
higher
bond
yields
helped
cushion
losses
from
the
Fed’s
additional
rate
hikes
during
the
year.

For
2023
overall,
the
60/40
portfolio
posted
its
best
returns
since
2019.

Calendar-Year
Returns
for
the
60/40
Portfolio

Source:
Morningstar
Direct,
December
31
2023

It
also
fared
better
than
many
of
the
competing
strategies
often
purported
to
be
superior,
such
as
tactical-allocation
funds
and
alternative
investments.
Returns
were
better
than
all
of
the
competing
areas
shown
in
the
table
below,
and
risk-adjusted
returns
outpaced
all
but
one
of
them.

2023
Performance

Granted,
it
would
be
premature
to
declare
a
decisive
victory
for
the
traditional
balanced
portfolio.
An
investor
who
bought
into
the
strategy
at
the
beginning
of
2022
would
still
have
been
slightly
underwater
(to
the
tune
of
about
$200
[£157] on
an
initial
investment
of
$10,000)
as
of
December
31
2023.

Moreover,
stock
and
bond
correlations
continued
trending
higher
in
2023
after
moving
up
significantly
in
2022.
When
stocks
and
bonds
are
moving
in
tandem,
combining
them
doesn’t
offer
as
much
of
a
risk-reduction
benefit
as
it
would
otherwise.

Rolling
12-Month
Correlations
(Stocks
vs
Bonds)

Source:
Morningstar
Direct,
December
31
2023

How
Will
60/40
Portfolios
do
in
2024?

The
60/40
portfolio
could
suffer
additional
challenges
in
the
future.
If
inflation
resurfaces,
correlations
between
stocks
and
bonds
would
likely
remain
elevated.
In
our
previous
research,
we
found
stock/bond
correlations
trend
higher
during
periods
of
high
inflation.

And
even
if
inflation
continues
to
moderate,
conditions
will
likely
be
tougher
for
balanced
portfolios
than
in
the
past.
The
Fed
may
cut
interest
rates
in
2024
(as
it
has
indicated
that
it
expects
to
do),
but
it’s
unlikely
to
return
to
the
zero-interest-rate
policy
that
prevailed
from
January
2009
until
February
2022.
Without
aggressive
interest
rate
cuts
as
a
tailwind,
correlations
between
stocks
and
bonds
may
not
return
to
the
low
levels
experienced
during
the
zero-interest-rate
policy
era.

A
period
of
more
modest
equity
returns
would
also
portend
more
moderate
returns
for
the
60/40
portfolio.
On
average,
the
seven
major
asset-management
firms
included
in
Christine
Benz’s
annual
compendium
of
capital
market
expectations
(excluding
GMO,
which
is
perennially
bearish)
are
forecasting
nominal
returns
of
about
5.5%
for
US
stocks
over
the
next
10
years,
compared
with
nominal
returns
of
about
11.6%
over
the
past
10
years.

At
the
same
time,
however,
projected
returns
for
bonds
have
significantly
improved.
The
same
seven
firms
forecast
nominal
returns
for
US
aggregate
bonds
of
about
5.0%,
on
average,
which
would
be
a
major
improvement
over
their
1.7%
average
annual
returns
over
the
past
10
years.

What
Does
The
60/40
Story
Show
us?

There
are
a
few
lessons
to
draw
from
the
60/40
portfolio’s
swift
fall
and
partial
redemption.

For
one,
it’s
not
realistic
to
expect
any
portfolio
strategy
to
excel
in
every
market
environment.
As
my
colleague
John
Rekenthaler
points
out,
it’s
easy
to
criticise
traditional
balanced
funds
for
not
adapting
their
portfolios
to
changes
in
market
conditions,
but
it’s
far
more
difficult
to
craft
something
that
works
better.
Market
shifts –
especially
fundamental
regime
changes –
matter,
but
how
to
position
a
portfolio
in
response
is
usually
only
obvious
in
retrospect.

The
60/40
portfolio
strategy
may
not
be
perfect,
but
its
simplicity
and
proven
long-term
resilience
make
it
a
much
better
starting
point
than
most
other
approaches
to
portfolio
construction.

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