Is the 60 / 40 portfolio dead?

In the wake of last year’s challenging investment environment, some market watchers are asking if the 60/40 portfolio is dead. Articles from Barron’s, Kiplinger, and other financial outlets splashed headlines trumpeting the investment strategy’s demise.

Before we declare the 60/40 dead, let’s take a closer look at the subject. A 60/40 portfolio is one that is made up of 60% stocks and 40% bonds. While it can be made up of individual stocks and bonds, in most cases portfolios will use diversified investments such as mutual funds and ETFS to follow this strategy. Some of you may know 60/40 by another name as a balanced fund with Fidelity, Vanguard, and Schwab all offering funds that target 60% stocks and 40% bonds.

There’s no sugarcoating that last year was brutal for the 60/40 portfolio. The Morningstar US Moderate Target Allocation Index fell 15.3% in 2022. Depending on what data you use and whether you consider inflation, it was the worst performance since the Global Financial Crisis of 2008 or the Great Depression. What was particularly unmooring about last year is that bonds are normally seen as a protected harbor during stormy stock markets. But with the Bloomberg US Aggregate Bond Index down over 13% last year, the supposedly safe harbor was pretty bumpy.

One poor year a bad strategy does not make. One year of below average performance does not augur that markets will continue to perform this way. If anything, it may be a better time to use a 60/40 strategy than the last few years. Keep these thoughts in mind when deciding whether the 60/40 may make sense for you despite last year’s performance.

Yield is a useful predictor of bond performance

If you want to know how much interest a bond fund pays, a good place to start is the SEC yield. This standardized formula considers the investment income that a fund has earned over the last 30 days less fund expenses. Many studies have shown that there is a strong relationship between yields and future bond performance. The yield of short-term Treasury bonds has climbed quickly with one year Treasury bonds now yielding almost 5%, and two-year bonds yielding 4.6%. If 40% of your portfolio is in bonds, it’s reasonable to expect that returns will be likely higher in this portion of your portfolio than they have been in recent years.

Investments tend to recover a year after entering bear markets

Investors remember that last year started with a bust as the S&P 500 set its high on Jan. 3, and then proceeded to cross into bear market territory on June 16, last year. Bear markets average about 9.6 months in duration, so our current bear has grown very long in the tooth. Over the last 65 years, the broad U.S. market has done quite well on average one year after entering a bear market. We cannot know if this pattern is set to repeat itself, but it should reassure investors who fear that we’re destined for moribund stock performance this year.

The 4% withdrawal rule

Bill Bengen’s 1994 paper on the four percent withdrawal rule is among the most cited in financial planning. It states that since 1926, a portfolio made up of 50 to 75% stocks and the re

mainder in bonds has lasted 30 years when taking out 4% of the portfolio balance in the first year of retirement, and then adjusting for inflation after that point. The 60/40 falls neatly into this range.