Putting 60% of a portfolio in stocks and 40% in bonds is supposed to hedge against both assets dropping simultaneously. But it didn’t pan out that way in 2022.
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Inflation and rising interest rates whacked both asset classes, and a Bloomberg index tracking a 60/40 mix is down about 17% for the year. But some veteran investors say the classic approach to investing still makes long-term sense, and that bonds are positioned to regain their status as a good counterweight to stocks.
For long-term investors, the drop in stock valuations and the rise in bond yields in 2022 sets the stage for future average returns of 6.9% on the 60/40 mix, according to Leuthold Group, a market research and money management firm.
But those returns may come with more volatility than in the past, the report concluded.
Leuthold’s research used the S&P 500 as its stock proxy. But the stock portion of a 60/40 portfolio shouldn’t be entirely in US stocks, said Christine Benz, director of personal finance at Morningstar Inc.
“I always think that’s how the mix is conventionally construed, but the experts don’t recommend that, and I certainly wouldn’t, either,” she said. “Most investors should have exposure to international equities and have some — not a lot, but some — cash on hand.”
Vanguard Group is also counseling patience with a 60/40 strategy, noting in a report that over shorter time frames it’s not that unusual to see stocks and bonds decline in concert.
Since 1976 there have been, on average, a month of joint drops about every seven months, the research found. But during that same period, “investors never encountered a three-year span of losses in both asset classes,” according to the report.
Read the full article here by Suzanne Woolley, Advisor Perspectives.
