What You Need to Know
- The strategy has taken a blow this year as stocks and bonds both fell.
- Equities and fixed income had traded in opposite directions for decades.
- Market experts debate the outlook for the traditional balanced portfolio.
After rewarding long-term investors for decades, the traditional “60/40” portfolio — 60% stocks, 40% bonds — has stirred debate this year as both types of securities sank amid high inflation and aggressive Federal Reserve interest-rate hikes.
The popular strategy has come under more scrutiny recently given further market upheaval, with strategists noting the long-reliable structure may be in for a historically bad year. What’s unclear is whether this year’s drubbing signals a permanent change for the worse for the 60/40 portfolio or presents an unusually appealing investment opportunity.
Northman Trader founder Sven Henrich and Morningstar’s client solutions chief, Ben Johnson, on Friday tweeted a Bank of America chart showing that, on a year-to-date annualized basis, the 60/40 portfolio was down more than 30%, which BofA called the worst annualized YTD return in 100 years.
Others made a similar point with different stats.
“A 60/40 Portfolio of U.S. Stocks/Bonds is down 21.6% in 2022, on pace to become the 2nd worst year in history after 1931,” Charlie Bilello, Compound Capital Advisors founder and CEO, and others tweeted Sunday.
Matt Brown, founder, CEO and chairman at CAIS Group, an alternative investment platform for financial advisors, last week declared the 60/40 balance “officially over,” suggesting to Yahoo Finance that portfolios need a 50/30/20 structure, with the 20% comprising alternatives. He’s far from alone among strategists who’ve recommended adding alternative investments to the stock-and-bond mix this year to potentially achieve higher returns.
Meanwhile, Ryan Detrick, Carson Group chief market strategist, took an optimistic stance in late September while noting in a tweet that the 60/40 portfolio was down nearly 21%. “The good news is there is still time and the best 3 months for stocks during a midterm year are coming up,” he added.
And early this month, retweeting Detrick, Roy Mattox, chief market strategist and portfolio manager for Integrated Financial Strategies, said:
“My takeaway is that 2022 will go down as the worst year ever for a 60/40 portfolio. Down 30% is not out of the conversation based on the math. On a favorable note, this bear market will set the stage for a tremendous, multi-year bull market run in both stocks and bonds.”
Christine Benz, Morningstar director of personal finance, said in an email Monday to ThinkAdvisor that “the 60/40 is a model of simplicity. … People disparaging it are often pushing some more costly and complicated agenda.”