According to Morningstar, the 60/40 portfolio recently weathered its first real test since the 2022 bond market crash. During the stock market sell-off in the first week of August, high-quality bonds did what they were meant to do: They played defense, said Jason Kephart, director of multi-asset ratings at Morningstar. The Morningstar U.S. Market Index, a benchmark for stocks, fell 6.3% from August 1 to August 5, its worst five-day performance since June 2022. Meanwhile, the Morningstar U.S. Core Bond Index rose 1.5% as investors fled to safe assets. “Inflation is not the cause of this stock market crash,” Kephart explained. “When inflation is not an issue, bonds have performed the same as they have in the past.” “It’s been fantastic,” he added. The strategy revolves around a simple balanced portfolio with 60% allocated to stocks and 40% to bonds. Traditionally, stocks and bonds move in opposite directions, which reduces the volatility of the portfolio. But in 2022, when the Federal Reserve started raising interest rates to combat inflation, both stocks and bonds plummeted. The iShares Core Growth Allocation ETF (AOR), which mimics the 60/40 portfolio, fell 17.4% that year. AOR 1Y mountain iShares Core Growth Allocation ETF mimics the 60/40 portfolio Since then, the strategy has been making a comeback. According to Vanguard, the 60/40 portfolio has posted a cumulative return of 20.5% since 2022 as of May 2024. Even with the 2022 crash, the annualized return over the past decade is 6.2%, but that’s mainly due to the outperformance of stocks, said Zachary Rayfield, head of goal-based investing research at Vanguard. The Valley Forge, Pennsylvania-based financial firm sees the plain vanilla 60/40 strategy performing well over the next decade. “We don’t expect the same level of outperformance on the equity side, but we do expect the bond allocation to play a bigger role, not just in terms of cushioning or downside protection, but also in terms of overall portfolio performance,” Layfield said. What could hinder performance is inflation-driven volatility, Morningstar’s Kephart said. When inflation is higher than expected, interest rates typically rise, which in turn drives down bond prices and raises bond yields. Stocks typically react negatively to higher borrowing costs. That said, inflation is currently subdued. The Consumer Price Index, which measures the prices of goods and services, rose 0.2% in July, below what economists expected. That brought the 12-month inflation rate to 2.9%. “If inflation continues on its current trajectory, we can expect bonds to become a reliable defense again,” Kephart said. Building a 60/40 Portfolio 60/40 is another way of saying a balanced, diversified portfolio. So the allocation can be altered depending on your age, retirement date and personal needs. Still, it’s a great starting point, says Vanguard’s Rayfield. “60/40 strikes that sweet spot,” he says.[It] Allow [you] You need to be flexible not just in market scenarios but also in target time scenarios. ” Margherita Chen, certified financial planner and CEO of Blue Ocean Global Wealth, says investors should diversify within these buckets. For stocks, she likes to include a range of market caps, from mega-cap to small-cap. In addition to U.S. stocks, she also includes international and sometimes emerging markets, depending on the client’s age and risk tolerance. She also mixes growth and value stocks with different cycles. For bonds, she also wants to diversify in terms of maturity and credit. For wealthy clients, Chen likes to include municipal bonds, because they are not only exempt from federal taxes, but also from state and local taxes if the investor lives in the same jurisdiction as the issuer. She doesn’t look for funds that use leverage or take on too much risk. “If you’re not sure what to include, look for something with Total Return or Strategic in the name. “Anyone who’s telling you ‘this is bad’ or ‘it’s gone’ about 60/40 is actually trying to sell you something more complicated and more expensive,” Kephart said, noting that such complex investments generally don’t perform well. “If you want to keep it simple, invest in the S&P and Bloomberg Aggregate Bond Indexes. That’s going to be a pretty solid portfolio,” he added.
Vanguard says 60/40 portfolio will perform well over the next decade
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