Signal From Static: The 60/40 Is Dead. Long Live the 60/40.

Daniel P Wiener

Chairman

The 60/40 portfolio (60% stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company., 40% bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates.) is dead. You know it, I know it, and certainly the pundits seem to know it. Or at least that’s the assumption given all the media hype. Heck, looking at the chart below, it’s easy to see why:

For decades, advisers have been recommending investors allocate 60% of their portfolios to stocks and 40% to bonds because, typically, when one fell the other rose, smoothing returns over time. And when stocks or bonds underperformed long enough, the prescribed cure was rebalancing, or selling portions of the outperforming asset class and buying the underperformer to maintain that golden ratio. Whether rebalancing actually improves performance or mitigates riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. is a discussion for another day. But it certainly hasn’t worked this year.

It’s easy to second-guess yourself and think, “Well, maybe I should have been a bit more cautious.” Or, given the unprecedented shellacking bonds have taken in 2022, you might wonder if you should have decreased your allocation to fixed income and taken a dive into equitiesThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid., where yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. were at least competitive and potential gains were greater. If the 60/40 is dead, could a 20/80 or an 80/20 allocation have survived this bear attack?

The following chart shows the monthly performance of five portfolios allocated to combinations of Vanguard’s 500 Index fund and Vanguard’s Total BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. Market Index fund.

No matter how you slice and dice it, the results are the same: At the end of October, the portfolios’ values ranged from $82.59 to $83.78, a meager difference of—unbelievably—just $1.19 (or 1.19%) of the original $100 investment. The results are virtually identical for those who rebalanced monthly.

The reason is simple: Not only have bonds and stocks fallen, but they’ve fallen at about the same rate. Rebalance or not, virtually all investors who’ve stuck with one consistent allocation throughout 2022 are at the same place today.

Where are the “Death of the 20/80 Portfolio” headlines? Nowhere, of course. So, let’s be fair. The 60/40 was certainly not an outlier in this annus horribilis.