{"id":12782,"date":"2023-10-30T15:24:12","date_gmt":"2023-10-30T15:24:12","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=12782"},"modified":"2024-01-10T17:16:43","modified_gmt":"2024-01-10T17:16:43","slug":"is-the-60-40-portfolio-a-thing-of-the-past","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/is-the-60-40-portfolio-a-thing-of-the-past\/","title":{"rendered":"Is The 60\/40 Portfolio A Thing Of The Past?"},"content":{"rendered":"\n

The \u2018Collapse\u2019 of the 60\/40 Portfolio<\/strong><\/p>\n\n\n\n

For a long time, a \u2018balanced\u2019 portfolio of 60% stocks and 40% bonds was a tried-and-true strategy for pursuing goals of growth and capital preservation at the same time. When stocks do well, the portfolio benefits from growth. And when stocks do poorly, bonds are expected to mitigate the downside and reduce volatility. Many investors follow the popular adage that \u2018100 minus your age\u2019 is how much you should allocate to stocks.<\/p>\n\n\n\n

But these long-held beliefs have been challenged recently.<\/p>\n\n\n\n

2022 was a difficult year for both stocks and bonds, which also meant weak returns for 60\/40 portfolios. Performance varies based on categories of stocks and bonds in a portfolio, but I\u2019d venture to say that most 60\/40 portfolios probably declined in the neighborhood of -15% in 2022, which marked the worst performance for that allocation since at least 1937. And to make matters harder for 60\/40 investors, while stocks have staged a recovery in 2023, bonds continue to underperform as interest rates have been pressured higher by stronger-than-expected economic growth.1<\/sup><\/p>\n\n\n\n

Just Released: New Zacks Stock Market Outlook Report!<\/a><\/span><\/strong><\/p>\n\n\n\n

Free to Mitch on the Market readers, this report provides valuable insights to help investors make the best investment decisions to improve their investing portfolios.<\/p>\n\n\n\n

In this report, you will find key forecasts and facts to consider as we focus on the final quarter of 2023, such as:<\/p>\n\n\n\n

\u2022 Top-down S&P 500 year-end 2023 target
\u2022 Setting return expectations for 2023
\u2022 International update on key global regions
\u2022 And more\u2026<\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<\/p>\n\n\n\n

Download the November 2023 Stock Market Outlook Report2<\/sup><\/a><\/span><\/strong><\/p>\n\n\n\n

This dynamic has many investors wondering if the benefits of the 60\/40 portfolio are gone for good.<\/p>\n\n\n\n

But I wouldn\u2019t be so quick to leap to that conclusion. For most of history, bonds have been effective at mitigating equity market risk, and they have also helped portfolios generate positive returns during periods when equities sold off sharply. When it mattered most \u2013 i.e., during the 2008 Global Financial Crisis \u2013 bond prices soared in the wake of the \u2018flight to safety\u2019 into U.S. Treasuries. During the past 20 years, there has been a consistently negative correlation between stocks and bonds, with basically the only exception being 2013\u2019s \u201ctaper tantrum\u201d when both declined in lockstep.<\/p>\n\n\n\n

As readers can see in the table below, long-duration U.S. Treasury bonds have held up remarkably well \u2013 and almost always delivered positive performance \u2013 during the biggest equity market drawdowns. 2022 is arguably the exception, not the rule.<\/p>\n\n\n\n

\"\"
Source: Morningstar, UBS3<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Now to be fair, there have also been several periods \u2013 sometimes long ones \u2013 where bonds and stocks were positively correlated. Those periods also happened to be ones where there was high inflation uncertainty, i.e., the 1970s and 1980s. Some have argued that an inflation rate of 2.5% is the point at which stocks and bonds flip in correlation from positive to negative or vice versa. During high inflation regimes, bonds suffer as coupon payments become less valuable and as investors demand higher yields, and stocks suffer from lower expected growth rates and cost pressures. High inflation can thus hurt both asset classes.<\/p>\n\n\n\n

Expectations for higher-than-average inflation do not mean it\u2019s time to abandon bonds in an investment portfolio, however. For one, inflation may continue to trend downward, and the Fed may find themselves in a situation where rate cuts make the most sense in 2024. That would likely benefit fixed-income performance.<\/p>\n\n\n\n

Second, it\u2019s important to remember that the fixed income portion of a portfolio can still serve all of the functions a long-term investor needs it to: generating cash flows, mitigating equity volatility risk, and preserving capital. This is especially true, in my view, when bonds in a portfolio are generally held to maturity (unless credit issues arise) and when duration is managed activity \u2013 both of which we do here at Zacks Investment Management.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

For the past couple of years, we have held a fairly cautious stance on fixed income as we anticipated rising rates, which led us to keep duration on the shorter end while focusing on higher credit quality bonds. Our decision-making also generated positive outcomes for our lower duration preferred stock portfolio, which mitigated the stock market\u2019s downside effectively last year \u2013 with our Preferred strategy declining -10% compared to the benchmark\u2019s -18% drop.<\/p>\n\n\n\n

Looking ahead, yields are now in a place where investors can stay on the short end of the curve and still earn a positive real (inflation-adjusted) return, which is of course a break from the previous low-inflation low-interest rate regime when investors were starved for yield. For fixed-income assets held to maturity, the goals of preserving capital and generating cash flow are back on the table.<\/p>\n\n\n\n

To provide our readers with a more in-depth perspective on the stock market and what can be anticipated from now until the year’s end, I recommend downloading Zacks’ latest Stock Market Outlook Report4<\/sup><\/a><\/span><\/strong>.<\/p>\n\n\n\n

This report discloses facts and predictions to help guide your investing strategy for what\u2019s to come. For example, you’ll discover Zacks\u2019s view on:<\/p>\n\n\n\n

\u2022 Top-down S&P500 year-end 2023 target
\u2022 Setting return expectations for 2023
\u2022 What produces 2024 optimism
\u2022 What\u2019s alive for 2024 pessimists
\u2022 International update on key global regions
\u2022 And more\u2026<\/p>\n\n\n\n

Prepare your portfolio for what lies ahead by reading this new report today.<\/p>\n\n\n\n

FREE Download \u2013 Zacks’ November 2023 Stock Market Outlook Report<\/a><\/span><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Traditionally, a balanced portfolio of 60% stocks and 40% bonds has been the tried and true strategy for long-term investors. But does that formula still work? <\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-12782","post","type-post","status-publish","format-standard","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12782","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=12782"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12782\/revisions"}],"predecessor-version":[{"id":12785,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12782\/revisions\/12785"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=12782"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=12782"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=12782"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}