Chart of the Week: What Follows a 10%-Plus Decline?

Chart of the Week: What Follows a 10%-Plus Decline?

By now, you are probably well aware that stocks have had a rough first half of the year. But most investors are invested in a blend of stocks and bonds—so how have balanced portfolios fared in down markets like this one?

Pundits have pronounced the classic balanced portfolio dead for years. (Wall Street coined the term “policy portfolio” for strategies that allocate 60% of assets to stocks and 40% to high-quality bonds because it is the default for many endowments and pension funds.) But the requiem is growing louder due to dreadful recent performance. If the current calendar quarter had ended on Thursday, the 60/40 portfolio would be showing a loss of 15.1% for the year. Outside of the global financial crisis, you have to look back to 1974 to find a six-month period where a balanced investor was down that much.

This has led to the conclusion that the efficacy of blending stocks and bonds into a balanced portfolio is a dead end. I’m not jumping to that conclusion. I’m also willing to give the classic 60/40 policy portfolio a rethink. But if you’ve been invested in a diversified portfolio over time, let me suggest that now may be precisely the wrong time to steer in a new direction.

I looked at rolling six-month returns for the 60/40 portfolio going back to 1945 and identified every period with a 10% or greater decline—there were 15 of them, not including the first half of this year. On average, the classic balanced portfolio gained 10% over the next six months and was negative only once. If you look out over 12 months rather than six, the 60/40 portfolio was higher every single time, with an average return of 18%.

As the disclaimer says, past performance is no guarantee of future results. We can’t change the past, of course, but we can try our best to position our portfolios for the road ahead. A lot of pain has already been handed out in both the stock and bond markets this year. Historically, returns have been attractive following periods like the one we are currently going through.

60 40 portfolio performance after a market decline
Note: Chart shows the 16 six-month periods when a 60/40 stock/bond portfolio declined 10% or more and the returns six and 12 months following the bottom for the from 1946 through June 2022 for which data are available. Stocks are represented by the Ibbotson Associates SBBI US Large Stock Total Return index and bonds by the Ibbotson Associates SBBI US Intermediate-Term Government Total Return index. Source: Morningstar.

This material is distributed for informational purposes only. The ideas and opinions contained herein  should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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