July 5, 2023

The 60/40 is Thriving Amidst Change, Poised for a Bright Future!

You may have heard some chatter about the “death of the 60/40 portfolio” (60% equities and 40% fixed income). But in case you missed it, here is a quick sample of recent headlines:

  • “Is the 60/40 Portfolio Dead?” by US News (2022)
  • “Why Your 60/40 Balanced Portfolio Isn’t Working in 2022” by Morningstar​ (2022)
  • “Is the 60/40 Portfolio Dead?” by Forbes (2023)
  • “Is The 60/40 Portfolio: Is It Still Relevant?” by Jordan Doyle and Urav Soni (2023)

Some of our clients think it’s a topic that’s causing quite a stir, but in reality, it’s more like a scary campfire that’s been making the rounds (again).  They didn’t even bother to get creative with their headlines!  Fortitude Financial put out “The Death of 60/40” back in 2009.

As your friendly team of investment professionals, we are here to dispel urban myths, and when it comes to retirement investing, provide some clarity to the issue. In our assessment, the 60/40 portfolio is not only alive but could be on the brink of a promising phase.

Let’s rewind to 2022. It was indeed a challenging year for both stocks and bonds that comprise a 60/40 portfolio– a rare occurrence in the past 45 years. The main driver behind this was the Fed’s aggressive rate hikes. However, as we approach the end of this tightening cycle, we can reasonably expect bonds to return to their role as diversifiers, providing a safety net in your portfolio. The “bears” meanwhile, decided to pump out nervous articles, questioning the efficacy of the portfolio. The 60/40 is not a “tactical” allocation that is meant to be held over just good years in the short-term, but strategically, over good and bad years, over the long-term.

Interestingly, the Fed’s actions have led to a positive outcome for the 60/40. Most classes of bonds are now offering significantly higher yields than a year ago. This means that with bonds offering higher potential income today, you can afford to be more conservative with your equity investments and still meet your return expectations. Dividends are also set to play a more significant role. With more attractive dividend yields now than in the years following the 2008 housing crisis, adding dividend payers and dividend growers to the equity side of the 60/40 portfolio can provide a boost to your overall returns without taking on excessive risk.

Looking ahead, there’s no need to be pessimistic about the 60/40 portfolio. With bonds offering higher yields, the Fed easing up on rate hikes, and valuations becoming more attractive across a range of stocks, the conditions are actually favorable for a bright future with the 60/40. However, it’s important to remember that successful investing isn’t just about how much equity and fixed income you have, but also what kinds you have of each. That’s why we’ve made a few adjustments to your fund lineup and allocation without disrupting the overall strategy.

While 2022 was a challenging year for stocks and bonds, it’s crucial to remember that the 60/40 portfolio and asset allocation as a whole are not going anywhere. Diversifying your portfolio risk helps us achieve balance and manage expectations. We also understand that a one-size-fits-all approach doesn’t work for everybody, which is why we also offer a range of portfolio allocations and customized solutions that align with investor objectives beyond the 60/40.

Stay invested, stay informed, and please reach out to us to schedule your next appointment!