Why Now May Be the Wrong Time to Write Off the 60/40 Portfolio

(Bloomberg) — The classic 60/40 portfolio, where investments are split 60% in stocks and 40% in bonds, has taken a beating this year as both asset classes have plunged. 

But now may be “precisely the wrong time to steer a new path” and abandon the balanced approach, according to a newsletter for Vanguard investors.

The Bloomberg index that tracks the 60/40 portfolio tumbled 17% in the first six months of the year, its deepest first-half dive since 1988, as rising inflation and interest rate hikes by the Federal Reserve sent bond prices into a tailspin at the same time as stocks plunged into a bear market.

Whether bonds will still work a hedge against stocks is currently a  big debate on Wall Street. Goldman Sachs Group Inc. expects continued interest rate hikes by the Fed to keep the pressure on Treasuries, while JPMorgan Asset Management thinks bonds will rally in the next recession.

If history is any guide, the 60/40 portfolio could be set for a big gain in the back half of the year, according to research by the Independent Adviser for Vanguard Investors, a monthly newsletter aimed at helping investors choose between Vanguard funds.

The newsletter’s research director, Jeffrey DeMaso, calculated all six-month returns for the investing approach going back to 1945 and identified every period with a 10% or greater decline. That left DeMaso with 15 of those periods, not counting the first half of 2022. 

On average, the 60/40 portfolio gained 10% over the following six months and was negative only once, the newsletter found. “Over 12 months, the 60/40 portfolio was higher every single time, with an average return of 18.4%.” 

To contact the author of this story:
Suzanne Woolley in New York at [email protected]