Is the 60/40 portfolio dead?


After last year’s difficult investment environment, some market observers are asking if the 60/40 portfolio is dead. Articles from Barron’s, Kiplinger and other financial outlets grabbed the headlines and proclaimed the investment strategy’s demise.

David Gardner
David Gardner

Before we declare the 60/40 dead, let’s take a closer look at the subject. A 60/40 portfolio is 60% stocks and 40% bonds. While it can consist of individual stocks and bonds, in most cases portfolios use diversified investments like mutual funds and ETFs to follow this strategy. Some of you may know 60/40 by a different name as a balanced fund with Fidelity, Vanguard and Schwab all offering funds that are 60% equities and 40% fixed income.

There’s no whitewash that was brutal on the 60/40 portfolio last year. The Morningstar US Moderate Target Allocation Index fell 15.3% in 2022. Depending on what data you use and whether you factor in inflation, this was the worst performance since the 2008 global financial crisis or the Great Depression. Of particular concern over the past year is that bonds are typically viewed as a safe haven during tumultuous stock markets. But with the Bloomberg US Aggregate Bond Index falling over 13% over the past year, the perceived safe haven has been rocky.

A bad year does not make a bad strategy. A year of underperformance does not suggest markets will continue to perform this way. If anything, it might be a better time for a 60/40 strategy than it has been in recent years. Keep these thoughts in mind when deciding whether the 60/40 might make sense for you despite last year’s performance.

Yield is a useful indicator of bond performance

If you want to know how much interest a bond fund is paying, the SEC yield is a good place to start. This standardized formula takes into account the investment income that a fund has generated in the last 30 days, minus the fund expenses. Many studies have shown that there is a strong correlation between yields and future bond performance. Short-dated government bond yields have risen rapidly, with 1-year government bonds now yielding nearly 5% and 2-year government bonds yielding 4.6%. If 40% of your portfolio is made up of bonds, it’s safe to assume that returns in that portion of your portfolio will likely be higher than they have been in recent years.

Assets typically recover a year after entering bear markets

Investors recall that last year started with a bust when the S&P 500 peaked on January 3rd and then entered the bear market on June 16th of last year. Bear markets last about 9.6 months on average, so our current bear is very old. Over the past 65 years, the US broad market has performed reasonably well, on average, one year after entering a bear market. We can’t know if this pattern will repeat itself, but it should reassure investors who fear we are in for a slump in 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 says that since 1926, a portfolio that is 50-75% stocks and the rest bonds has lasted 30 years if 4% of the portfolio balance was taken out in the first year of retirement and adjusted for inflation after that point. The 60/40 falls neatly into that range.

The “40” is good for calming the nerves

Some of the worst investing strategies you can use are those that give in to the tyranny of our natural fight-or-flight response. When the stock market gets out of hand, it’s reassuring to have short-term, high-quality bonds on hand. There is nothing worse for a retiree’s condition than taking funds for a living from a portfolio made up of dwindling assets. Being able to focus on the stability of bonds in bear markets can help give the investor the tenacity to invest in stocks, which are bound to be a volatile proposition but a crucial one when long-term growth is needed to keep your financial to support independence.

My final comment about the 60/40 Death Watch crowd is to be wary of making predictions based on events in the immediate past. It is similar to driving with your eyes mainly on the rearview mirror. While we care about where we’ve been, it’s not necessarily the same place we’re going to.

David Gardner is a CERTIFIED FINANCIAL PLANNER Pro at Mercer Advisors practicing in Boulder County. The opinions expressed by the author are his own and are not intended to constitute specific financial, accounting or tax advice. They reflect the author’s assessment at the time of publication and are subject to change. The information is believed to be accurate but Mercer Advisors makes no guarantees or warranties. Past performance may not be a guide to future results. Therefore, no current or prospective client should assume that the future performance of any particular investment, investment strategy or product directly or indirectly referred to will be profitable or equal to past performance. All investment strategies have the potential for profit or loss. Different types of investments involve different levels of risk and there can be no assurance that any particular investment will be suitable or profitable for a client’s investment portfolio. Economic factors, market conditions and investment strategies will affect the performance of each portfolio and there can be no assurance that it will meet or exceed any particular benchmark.

Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and provides all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved in investment services.

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