Traditionally, the 60/40 stocks/bonds tried and true asset allocation formula was an effective North Star to navigate through every market cycle imaginable.  The 60/40 investment allocation framework has several key advantages that have contributed to its historical popularity among investors:

1. Balance of Risk and Return: The combination of stocks and bonds in a 60/40 portfolio strikes a balance between the potential for capital appreciation and the need for stability
2. Diversification: By including both stocks and bonds diversifies across asset classes which can reduce the portfolio’s sensitivity to market fluctuations and enhance overall stability
3. Long-Term Performance: Historically(absent 2022 and ytd 2023), the 60/40 asset allocation has delivered competitive long-term returns while experiencing less volatility than an all-stock or all bond portfolio. This has made it an attractive choice for investors with a medium to long-term investment horizon.
4. Income Generation: The bond component of the portfolio provides a consistent stream of income through interest payments.
5. Flexibility: The 60/40 framework is adaptable to individual’s time horizon and risk tolerance. Investors can adjust the allocation to suit their specific needs, such as a more conservative 50/50 allocation or a more aggressive 70/30 allocation.

Both 2022 and thus far in 2023 have challenged the underlying premise of the 60/40 asset allocation framework, as equity market volatility and the rising rate environment has given investors cause to step back and re-evaluate.  Rates currently available in money market funds or T-bills yielding over 5% have also provided an opportunity for investors to stray away from the 60/40 formula while still earning a healthy return on their cash.

Interestingly, according to Putnam Investments, the 2022 declines in both the equity and bond markets was the only year in which both asset classes produced negative returns in the 47 years in which bond index information has been available.  Blackrock has shared the view that the 60/40 asset allocation framework is a good place to start, but that adding alternative investments such as funds that have both long and short positions.  Another path would be to include private equity in the portfolio to further insulate one’s portfolio from volatility.  KKR goes a step further and suggests that a 40/30/30 approach (equities/bonds/alternatives) merits consideration.

As the Fed continues to signal that the rate hiking regime may be over, bonds and equities have in recent days started to move in tandem in a positive direction, and it remains to be seen whether the 60/40 asset allocation will end up in positive territory for 2023.

 

The above in no way represents financial advice and individuals should consult with their financial advisors in making their own independent investment decisions.