The 60/40 portfolio is not obsolete

Anthony Saglimbene, Chief Market Strategist – Ameriprise Financial

Feb. 19, 2024

The 60/40 portfolio — a portfolio with 60% allocated toward stocks and 40% allocated toward bonds — has long been regarded as a simple and trusted long-term investment strategy that provides for growth, while mitigating risk. But its rocky performance over the last couple years has investors doubting its efficacy and promise of diversification.

Is the 60/40 portfolio becoming obsolete? Here’s our view:

A patchy couple years for stocks and bonds

The last few years of stock and bond performance may have felt like a roller coaster for many investors. The S&P 500 Index lost 18% in 2022, while the Bloomberg Universal Index lost roughly 13%. 2022’s sour performance across stocks and bonds was one of only two times going back to at least 1994 when each asset class posted an annual decline in the same year. In 2023, the S&P 500 roared higher by over +26%, while the Bloomberg Universal Index gained roughly +6%. 

Through much of 2023, the benefits of diversifying across each asset class, based on risk, were called into question by some, as the combination of stock/bond returns in 2022 was unimpressive, depending on the mix. However, a late 2023 rally in bonds brought both stocks and bonds into positive territory by the end of the year, with each providing an “additive” benefit to diversified portfolios. Hence, the roller coaster ride across stocks and bonds over the last couple of years may have caught investors off guard or, worse, caused them to deviate from a diversified investment approach.  

Bottom line: Elevated inflation and the rapid rise in bond yields over recent years have created more extreme volatility in stocks and bonds. As a result, their historical non-correlated direction and the benefits of diversifying across stocks and bonds longer-term appeared less obvious to casual observers. Fortunately, falling inflation last year and expectations that the Federal Reserve could finally begin easing monetary policy this year have helped both stocks and bonds start to return to a more normalized relationship.   

The worst years for a 60/40 portfolio are an exception, not the rule

As our table below shows, the simple 60/40 portfolio is hardly dead. We believe the time-tested strategy adds value/return potential longer-term and remains a solid benchmark to test the merits of diversification, particularly in periods where the strategy is drawing near-term scrutiny. 

Source: S&P Dow Jones Indices, Bloomberg, Morningstar American Enterprise Investment Services Inc. 60/40 portfolio is comprised of 60% stocks and 40% bonds. Stocks are represented by the IA SSBI US Large Stock Total Return Index from January 1927 through December 1970, and the S&P 500 Total Return Index since then. Bonds are represented by the IA SBBI Intermediate Term Total Return Bond Index from January 1927 through December 1975 and the Bloomberg U.S. Aggregate Total Return Bond Index since then. 60/40 portfolio is rebalanced monthly and does not consider transaction costs or other fees or expenses. Past performance is not a guarantee of future results.

In the last 97 years of measuring a 60/40 stock/bond portfolio, annual returns have been positive 77% of the time. Interestingly, there have only been a handful of times over that span that the portfolio mix lost more than single digits in a calendar year. In fact, we would argue that there have only been three double-digit losses for a 60/40 portfolio that are truly relevant to most investors, as most weren’t investing in the market in the 1930s. In our view, the Great Inflation in 2022, the Financial Crisis in 2008 and the 73/74 Bear Market appear explainable (and rare enough) environments as to why the combination of stocks and bonds didn’t perform well. 

Diversification still works

One of the greatest draws of the 60/40 portfolio is its potential to help mitigate risk through diversification. If one asset class is performing poorly, it’s likely that the other is doing better.  

While it may feel today like the strategy of diversification hasn’t worked so well (largely because bond prices came under pressure as rates spiked higher in 2022 and early 2023), we suggest investors discount the recency bias from their views. Although the strategy lost 15.8% in 2022, an investor that stayed the course gained +17.7% the following year. Importantly, in the long run, the 60/40 portfolio mix has generated an impressive average annual return of +9.3% longer-term for less risk than a 100% stock portfolio. 

Bottom line: Historically, diversification works over time. Notably, stocks and bonds serve complementary purposes in a portfolio, and importantly, with the potential for a more stable interest rate environment in 2024, bonds should again help blunt risk in equities.  

With rates likely approaching their high-water mark for this cycle, inflation ebbing lower this year and economic/profit conditions still on firm ground, we see the benefits of diversification returning to form, with the combination of stocks and bonds continuing to play critical roles in shaping a well-balanced portfolio for the long term.

Go beyond a 60/40 portfolio with an Ameriprise financial advisor

While the 60/40 portfolio is a good investing approach to understand, it doesn’t account for other asset classes, such as cash and alternative investments. And it also doesn’t account for your unique financial situation.

When you work with an Ameriprise financial advisor, your portfolio’s asset allocation is tailored to your financial goals, time horizon and risk tolerance. Reach out to them today if you’d like to review your asset allocation or make adjustments.