60/40 Might Be Punch Drunk

Left hook then a straight right!¹

We are not 60/40 portfolio haters but...

60/40 is a classic portfolio comprised of 60% stocks and 40% bonds. If you are looking for a portfolio, the odds are pretty good that you started with a 60/40 and adjusted from there. The downside of being classic or the standard is that everyone takes potshots at you. The 60/40 is simultaneously the gold standard and the target of mass ridicule. Everyone wants to knock out the champion.

We have examined the 60/40 both in terms of return and correlation².  In recent memory, the diversifying power of the 60/40 has been ameliorated by the simultaneity of both run-ups and drawdowns of stock/bond portfolios. Also, the recent down year of 2022 for the 60/40 has many investors questioning its usage going forward. We will take another swing at the champion by looking at the yield, which is depicted in the graph above. Like many metrics, the most damning have occurred in the recent past. Taken against the US T-Bill, the yield for the 60/40 has fallen below it. This is not the first time that this has happened; e.g., 2000, in the tumultuous 1929-1945 period, and in the inflationary 1965-1981 era. We are certainly not saying that T-Bills are a better investment than the 60/40! Far from it! We are simply noting yet another piece of datum that illustrates the champion has had another hit. It is hard to retire as the champion; 60/40 is experiencing that reality today.

Why is this happening? It is hard to say except for the concrete fact that interest rates are going up and might be sticky at this level. “Higher for longer” or “The new normal”’s ubiquitous usage in media/political-economic punditry these days comes to mind. We have the luxury of not having to make the tactical call on whether this will continue. As investors we concern ourselves with our goals and risk tolerance. Diversification, whether through liquid alternatives or some other means, can be a way to smooth out the bumps in the roller coaster performance that has been the 60/40 ride this year and last.

Is this a haymaker? No. This singular evidence is not the end of 60/40. We know because it has happened in the past, and 60/40 did not “go down for the count.”  A sustained period of this behavior would give us pause. That could mean that interest rates have soared, and the economy has taken a turn for the worse. Given the latest economic news, we do not believe this to be the case. A call for the end of the dominance of the 60/40 portfolio is much different than a call for the end of its efficacy. We believe that its dominance might be ending, but we do not believe that it is useless. It is worth noting this has happened before. If the champion becomes #2, that still means he or she packs a wallop!

Past performance is not indicative of future results. Remember, there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investment strategies discussed in this article) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Please remember to always speak with your individual advisor before making any investment decisions.