Terrible year for 60/40 Portfolio
By Jack Daly | October 27, 2022
The 60/40 portfolio is known as the standard portfolio diversification for investors. The acronym stands for 60% stocks and 40% bonds. This allocation gives investors the upside of stocks which is theoretically unlimited, and the small, but guaranteed return that comes from bonds. The risk in this portfolio is significantly reduced, since a large amount consists of bonds, and as a result, this allocation is considered very conservative. However, that allocation has not treated investors well this year.
The chart below is from the YouTube show "The Compound" by CNBC contributor Josh Brown. The data below suggests that the 60/40 portfolio is on track to have its worst year since the Great Depression. However, we probably would not associate the experience of the Great Depression with the times we are in right now. So what does this say about where investors should put their money? I’m not a financial advisor, but my best guess is to hold off on investing your money until we break out of this bear market. What does this mean about the 60/40 portfolio going forward? My best guess is that this portfolio allocation will continue to be the gold standard for most investors.
From a long term perspective, there is nothing which suggests that this allocation is performing badly. Additionally, this year is an extreme outlier. We are not used to being in an environment where we have interest rates near 0 for years, and then all of a sudden go to 4-5% interest rates, causing turmoil in the market. In the end, this is not a story about how this allocation is continuously holding investors back. Rather, it is a story about how markets are hurting even the most conservative investors.
Edited by Thomas Anglim