The 60/40 Portfolio Experienced Death by a Thousand (Fed) Cuts. Will It Live To See Another Day? – The Average Joe


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    The 60/40 Portfolio Experienced Death by a Thousand (Fed) Cuts. Will It Live To See Another Day?


    January 4, 2024

    For decades, a portfolio made up of 60% stocks and 40% bonds has been a staple in 401(k)s, IRAs and brokerage accounts. From 1981 to 2020, the 60/40 portfolio returned 1,773% after inflation, according to WSJ. While not outperforming the S&P 500 in the long run, it offers diversification. When stocks fall, bonds can pick up their slack, and vice versa.

    But what happens when both fall? Well, investors found out in 2022. The famous strategy was no match for rate hikes, which wiped out both stocks and bonds — handing the 60/40 portfolio its worst performance since the Great Financial Crisis.

    Stocks rescued the 60/40 last year: 2023 was an improvement, but Wall Street still questioned the portfolio’s future. A standard 60/40 portfolio returned just 12% in 2023, clawing back part of the strategy’s 2022 losses.

    • But it didn’t come close to popular stock indexes… The S&P 500 returned 24%, and the tech-heavy Nasdaq-100 rose 54%.
    • And bonds were still underwater… Although bonds rallied to end the year, the Vanguard Total Bond Market Index Fund (NASDAQ:BND) rose just 1% in 2023 — leaving it over 18% below its Jul. 2020 highs.

    But bonds could carry the 60/40 in 2024

    Last year, WSJ Editor Spencer Jakab said that “set it and forget it” strategies like 60/40 won’t work as well as they have before — largely due to expensive stock valuations. Jakab’s analysis showed that stocks returned an average of just 2.7% annually in the following decade when trading at such levels. But there’s still hope for the 60/40 portfolio, thanks to bonds.

    • Vanguard defended the 60/40 portfolio in its 2024 outlook report, saying “the case for the 60/40 portfolio has strengthened” and anticipating “higher returns for long-term bond investors.”
    • The wealth manager’s Global Head of Portfolio Construction, Roger Aliaga-Diaz, expects the 60/40 portfolio to “deliver about 6% to 7% returns over the next ten years, which is about the historical average.”

    Forward-looking: While Aliaga-Diaz maintains that the 60/40 portfolio remains Vanguard’s recommended portfolio for passive investors, prospects for strong bond returns have led them to suggest a portfolio of 41% stocks and 59% bonds. Vanguard anticipates annualized US stock returns of 4.2-6.2% in the next decade, coupled with 4.8-5.8% returns from US bonds.

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