To borrow a phrase from Mark Twain, reports of the death of the 60/40 portfolio have been greatly exaggerated, according to The Leuthold Group.
The 7.9% annualized return seen over the last 30 years for balanced portfolios with 60% in stocks and 40% in fixed income obviously hit a major speed bump in 2022, said Scott Opsal, director of research and equities at the Minneapolis-based investment firm.
But falling stock valuations and rising bond yields have once again buoyed the portfolio’s return outlook, and Opsal said he expects 60/40 portfolios to return to levels very close to their historical average.
“My view today is that bond yields are in range of fair, and stock prices are in range of fair,” he said. “Starting today, you have a good shot of getting back to 7% or 8% returns in the next three years.”
Things changed for the 60/40 portfolio around September, he said.
“Pre-September, the 60/40 portfolio lost 20%, and the significance of this year is that both stocks and bonds are down. But that means both halves of the portfolio are less expensive,” he said. “This year we’ve repriced both assets to such a degree that the 60/40 mix is looking like its normal self. So if you’ve owned a 60/40 portfolio in the last year and it was doing poorly, don’t worry. It’s been repriced.”
Opsal said he was prompted to do the research for his latest paper, “The 60/40’s Annus Horribilis,” by the sight of headlines declaring the 60/40 porfolio is dead.
“The 60/40 is the most common mix of stocks and bonds,” he said. “It’s a very common benchmark, more common even than 70/30.”
So when it seemed the investing world had turned against this moderate allocation strategy, which for decades had done what it was supposed to do—trade a high return for a moderate return while also trading a lot of risk for much less risk— Opsal said he set out to get to the truth of the matter.
What he found was that “future returns are driven by current valuations, and those were singularly unattractive in late 2020 and early 2021,” he wrote in his research paper.
When he plotted the joint valuations of stocks and bonds during each quarter since 1976, the four worst performing quarters were the last two quarters of 2020 and the first two quarters of 2021. From that vantage point, Opsal said he understood it was hard to see how future 60/40 returns could come close to their long-term average.
“As it turns out, the skeptics were right! The 60/40 strategy is having a terrible 2022, and the strategy has utterly failed in protecting investors during this severe bear market.” he wrote.