Is the 60-40 portfolio still relevant? Some experts are arguing that it’s more important than ever.
Amidst a period of disappointing returns, the current yield on the 10-year Treasury note
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has led some strategists to advocate for a strong bond allocation in portfolios, with the potential for significant rewards.
With the Federal Reserve planning to cut interest rates, investors who take advantage of the current low bond prices could see long-term benefits, as the relationship between stocks and bonds normalizes, making bonds a valuable hedge during market turmoil, according to market strategists and portfolio managers interviewed by MarketWatch.
In addition, as stock valuations reach new highs, diversification is increasingly important. Portfolio manager Michael Lebowitz has even increased his bond allocation in response to these changes.
“Currently, you can earn 4% on a Treasury bond, which is not far off from the projected return in U.S. stocks right now,” Lebowitz said. “We’re adding bonds to our portfolio because we think yields are going to continue to come down over the next three to six months.”
See: Case for traditional 60-40 mix of stocks and bonds strengthens amid higher rates, according to Vanguard’s 2024 outlook
Since the 1950s, the 60-40 portfolio has been a mainstay in financial advice. The idea is that a mix of stocks and bonds can help to mitigate the risks for investors saving for retirement, as bonds tend to offset losses in equity portfolios.
However, the performance since the financial crisis has challenged this notion. The Fed’s bond-buying programs caused bond prices to increase and yields to decrease, muting total returns relative to stocks. At the same time, the easy money environment led to a decade-long bull market for equities that only ended with the arrival of COVID-19 in early 2020, FactSet data shows.
More recently, bonds have failed to offset stock losses, with U.S. equity benchmarks outperforming U.S. bond-market benchmarks in 2023, despite attractive bond yields, according to Dow Jones Market Data.
The Bloomberg U.S. Aggregate Total Return Index
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has returned 4.6% year-to-date, according to Dow Jones data, compared with a more than 25% return for the S&P 500 when dividends are included.
