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…
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