How a 60/40 portfolio strategy works
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’
Investors may need to recalibrate their approach
Their average correlation had been largely negative dating back to 2000, according to Vanguard research.
The S&P 500 Index is down 21% in 2022 and the Bloomberg U.S. Aggregate bond index is down 11%.
“It’s likely to work in the long-term,” Roth said of the diversification benefits of bonds. “High-quality bonds are a lot less volatile than stocks.”
Diversification ‘is like an insurance policy’
A balanced fund would also work well but asset allocations remain static over time.
Relative to bonds, investors should consider short- and intermediate-term bonds over longer-dated ones to reduce risk associated with rising interest rates. They should likely avoid so-called “junk” bonds, which tend to behave more like stocks, Roth said. I bonds offer a safe hedge against inflation, though investors can generally only buy up to $10,000 a year. Treasury inflation-protected securities also offer an inflation hedge.
Source: https://www.cnbc.com/2022/06/24/how-inflation-interest-rate-hikes-affect-the-60/40-portfolio-strategy.html