The 60/40 portfolio has long been the trusted strategy of investors with a subdued risk appetite. But the investment underperformance and heightened volatility experienced by these strategies lately have some investors and their advisors rethinking the approach.  

Over the past year, funds that split allocations to 60% stocks and 40% bonds have performed worse than equity benchmarks like the S&P 500 and Dow Jones Industrial Average.

One 60/40 portfolio, the Vanguard Balanced Index Fund Admiral Shares (VBIAX), has declined 12.85%, while another, the WisdomTree U.S. Efficient Core Fund (NTSX) has fallen 18.27%. Meanwhile, the SPDR Dow Jones Industrial Average ETF Trust (DIA), which is tied to the Dow Jones Industrial Average, has fallen just 11.63% over the same one-year time frame. And the SPDR S&P 500 ETF Trust (SPY) has fallen just 9.92%.

Is it time to abandon 60/40 strategies?

Some firms on Wall Street think so.

In its midyear 2022 update, BlackRock said, “A traditional 60/40 portfolio of stocks and bonds, hedges and risk models based on historical relationships won’t work anymore. We believe views should get more granular at the sector level or below.”

Goldman Sachs Asset Management echoed that view in an October 2021 research note.

“Investors must first come to terms with the reality that the stellar returns of recent years are likely to be more challenged,” Goldman said. “For context, the classic 60/40 portfolio has generated an impressive 11.1% annual return over the last decade. We find that these high returns have given rise to a feeling amongst investors that ‘what has worked will continue to work’—a behavioral misstep known as recency bias.”

When stocks are falling, the losses are usually offset by the stability of bonds. Conversely, when bonds are declining, stocks are often rising. This pairing of opposite assets in the same portfolio has generally worked well for 60/40 funds. But when the inverse performance relationship between stocks and bonds breaks down, as it has in 2022, the losses can add up fast.

Although stocks have sunk into bear market territory, bonds have hardly been a safe haven. In fact, the U.S. bond market is experiencing its worst aggregate performance in decades. The cause: aggressive rate hikes by the Federal Reserve, which have sunk the bonds’ prices. And if higher interest rates are still ahead, the worst might not yet be over for funds with large bond allocations.

First « 1 2 » Next