60/40 Portfolio

Death of the 60/40 Portfolio?

News headlines in 2022 continuously touted the end of the 60/40 portfolio – the traditional not-too-conservative, but not-too-risky mix of 60% stocks and 40% bonds.

Announcing the “death of the 60/40 portfolio” was a good headline and an opportunity for alternative fund managers to attempt to generate new business, but there was one flaw: the majority of asset classes saw a downturn over the same period. The 60/40 portfolio gets the best SEO (“search engine optimization” – the thing that puts an article at the top of search results), and thus is often used in investment headlines, however, portfolios allocating 70% to stocks and 30% to bonds was also down, as was any variation of passive index funds comprising of stocks and bonds.

So, what gives?

Inflation, interest rates, and markets. While there are times that stocks are down and bonds are up, there are also times (though less common) where both stocks are down in tandem. 2022 was one of these downside deviations that statistically is possible and does occur.

Why did this occur? At the end of 2021, market watchers generally predicted a good year ahead in the markets. Many factors converged to cause the losses in 2022, most specifically inflation, war, and interest rates. These three are correlated but do not always occur at the same time. The war in Ukraine caused global inflation to spike more than its 2021 pace, inflation of oil prices affects all companies over time and lead to increasing inflation in most areas of the global economy.

To combat this high inflation (the fastest increase the USA has seen since the 1980’s) the Federal Reserve responded with its most aggressive interest rate hikes in history, causing the prices of bonds and stocks to fall. This action, while necessary, made the cost of borrowing more expensive for companies, decreasing their values and stock prices, while causing a drop in the value of bonds issued before rate increases. Bond prices fall when newly issued bonds have a higher yield; this is affected by the interest rates set by the Federal Reserve.

Is the 60/40 portfolio dead? We at EVOadvisers would argue no, it is not. A mix of stocks and bonds is not dead, and while all portfolios do have risk, it doesn’t mean a portfolio is no longer viable when the statistically possible 1 in 100 event occurs. With higher interest rates, the total return from bond funds is higher than in 2021, positioning the total return of these funds over a 10+ year period to be greater than previous expectations. This improves the income generated from bonds in a portfolio, allowing a retired investor to spend the income generated by bonds rather than selling equities, which may lose value at times.

The root of the death of the 60/40 portfolio conversation has to do with correlation. Are stocks and bonds no longer inversely correlated? While is depends on the time period, over a long-term period, the addition of bonds in a portfolio has shown to decrease volatility in a portfolio. While stocks and bonds do experience periods of positive and negative correlation, an investor must consider their goals and planning objectives to make sure their asset allocation is best for them.

Working with a financial advisor is the best way to make sure your portfolio is best for your individual goals. EVOadvisers is a Fee-Only financial planner and advisor in Richmond Virginia, focused on working with individuals and families. To learn more about us, and speak with one of our Certified Financial Planners TM, click here.

Jack O’Brien CIMA® is a Certified Investment Management Analyst educated at Chicago Booth School of Busisness and Virginia Tech. EVOadvisers is a fee-only financial advisor based in the Scott’s Addition area of Richmond, Virginia. EVOadvisers also has an office in Irvington, Virginia to better serve clients in the Northern Neck of Virginia. If you have any questions about financial planning and would like to talk with one of our Certified Financial Planner professionals, check us out at www.evoadvisers.com or call (804)794-1981.

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