How I’m Talking to Clients About the 60/40 Portfolio Now

Is the classic 60/40 portfolio structure—typically represented by 60% S&P 500 and 40% U.S. Treasuries—a strategy of the past? Despite sensational headlines suggesting its possible demise, especially after challenging financial periods, there are compelling arguments to maintain confidence in this investment approach, albeit with an acknowledgment of its evolution.

Key Takeaways

• Rumors of the demise of the 60/40 portfolio are exaggerated.
• The average intra-year dip for the 60/40 portfolio has been -7.7%, yielding positive returns in 37 out of 44 years since 1980.
• However, the ability to fine-tune investment strategies demonstrates a shift away from a one-size-fits-all approach to a more nuanced and individualized framework.

The Resilience of the 60/40 Strategy

Frequent proclamations of the 60/40 portfolio‘s demise often follow market downturns. A prime example was the notable year of 2022, marking a rare instance when stocks and bonds underperformed simultaneously. This was particularly pronounced in the bond market, which experienced its lowest annual return on record. Yet, emphasizing a single year’s performance to forecast the demise of a long-standing investment strategy is overly simplistic. 

How I’m Talking to My Clients

Historically, since the financial crisis, a blend of the S&P 500 and the Bloomberg Barclays U.S. Aggregate Bond Index within a 60/40 framework has yielded an impressive average annual return of 11.5%, significantly above the historical norm. This suggests that short-term fluctuations should not overshadow the decades of success this approach has enjoyed.

The Principle of Long-Term Investment

The essence of sound portfolio construction lies not in chasing the latest market trends but in adhering to strategies proven successful over the long term. Despite annual fluctuations, the average intra-year dip for the 60/40 portfolio has been -7.7%, with the strategy yielding positive returns in 37 out of 44 years since 1980. 

A robust investment plan is predicated on the expectation of such fluctuations, emphasizing strategic, long-term asset allocation. This philosophy has consistently demonstrated its merit over extended periods. 

While the core idea of balancing stocks and bonds for long-term investment remains valid, the traditional 60/40 model has undeniably evolved. 

The Bottom Line

Today’s investment landscape offers unprecedented customization, facilitated by advancements in technology and product development. This era of personalized investing enables tailored portfolio adjustments, whether for ethical considerations, environmental, social, and governance (ESG) criteria, or specific financial goals. 

The ability to fine-tune investment strategies at competitive costs signifies the shift from a one-size-fits-all approach to a more nuanced and individualized framework. While the shorthand, rule-of-thumb 60/40 allocation model may no longer be the default strategy in an age of vast investment choice and customization, the principles underpinning a balanced, long-term investment approach endure. 

Adapting to the evolving financial environment, investors now have the tools to align their portfolios more closely with personal values and objectives without forsaking the wisdom of diversification and strategic asset allocation.

Read the original article on Investopedia.