The 60/40 investment strategy, which suggests putting 60% of your portfolio in stocks and 40% in bonds, has long been a staple of retirement planning. It’s a balanced approach designed to offer both growth potential (through stocks) and stability (through bonds). However, after a challenging year for bonds in 2022, many investors began to question whether this classic allocation still works.
As we look toward 2024, the 60/40 portfolio is experiencing renewed interest, and some experts say it’s still a solid strategy. Here’s an in-depth look at whether the 60/40 rule is still a smart choice for your retirement savings.
The Logic Behind the 60/40 Rule
The 60/40 rule is grounded in a simple principle: diversification. Stocks, known for their higher potential returns (around 10% annually on average), can be volatile, while bonds are generally considered safer, offering steady income and acting as a buffer when stocks take a hit.
For investors near or in retirement, this strategy helps reduce risk while still providing growth opportunities. The idea is that stocks will deliver long-term returns, while bonds can preserve capital and provide income, especially when stock markets are down.
2022: A Wake-Up Call for the 60/40 Rule
While the 60/40 strategy has worked well for decades, 2022 was a tough year. Both stocks and bonds suffered significant losses. The S&P 500 dropped by 18.6%, while bonds, measured by the Vanguard Total Bond Market Index, lost 13.7%. This was the worst bond performance in nearly 100 years, and it led many to rethink the viability of the 60/40 rule.
The root cause? Rising inflation and aggressive interest rate hikes by the Federal Reserve. Typically, bonds are a safe investment, but their prices tend to fall when interest rates rise. As the Fed increased rates to combat inflation, older bonds with lower yields became less attractive, causing bond prices to drop.
Additionally, inflation eroded the value of bond returns. If a bond pays 4% interest but inflation is 5%, investors lose purchasing power. These challenges left many wondering if the 60/40 strategy could still deliver consistent results.
Is the 60/40 Portfolio “Dead”?
Despite the rough performance in 2022, there are signs that the 60/40 rule is not dead. In fact, for many investors, it’s still a solid approach to building a long-term, balanced portfolio.
Jonathan Lee, senior portfolio manager at U.S. Bank, believes that the 60/40 allocation is still a valid benchmark for most investors, stating, “It’s a great starting point for building a balanced portfolio.” Similarly, Todd Jablonski, global head of multi-asset investing at Principal Asset Management, insists the 60/40 rule is “very much alive” and that it remains a reliable strategy for managing risk and growth.
The Current Landscape for Bonds and Stocks
After the turbulence of 2022, the investment landscape looks much different in 2024. Inflation has cooled, and while interest rates remain elevated, they are helping to boost bond yields. With bonds offering higher returns than in recent years, they are becoming a more attractive option again.
In fact, in 2023, a 60/40 portfolio posted a return of 17.7%, and as of early November 2024, it has gained 15.5%. These returns highlight the resilience of the 60/40 strategy, even after a poor showing in 2022.
In the last decade, stocks performed particularly well, contributing to solid gains for the 60/40 portfolio. But with stock valuations higher than historical averages, investors may see more modest stock returns going forward.
Todd Schlanger, senior investment strategist at Vanguard, notes, “The past decade has been a strong one for 60/40, but now, with stock valuations stretched, we may see lower returns for equities in the coming years.” Still, Schlanger remains optimistic about bonds, predicting they will play a more significant role in generating returns over the next decade than they did in the previous one.
Bond Yields: Higher Returns in the Current Environment
One of the key factors making the 60/40 portfolio more appealing again is the current environment for bonds. With inflation easing and interest rates still elevated, new bonds are paying higher yields than in the low-interest-rate years following the 2008 financial crisis and the COVID-19 pandemic.
For example, the yield on the benchmark 10-year U.S. Treasury bond is around 4.3%, which is significantly higher than inflation, making bonds a better choice for investors looking for stable returns. This marks a shift from the previous decade, where bond yields were often too low to provide meaningful returns.
“The higher bond yields are attracting more interest from investors who are looking for safe income,” says Jonathan Lee.
Why Bond Yields Are Rising
Bond yields are climbing, in part, due to concerns about the federal government’s growing debt. With rising deficits, investors demand higher yields to compensate for the risk of the U.S. government potentially borrowing beyond its means.
As the debt continues to grow, bond yields are likely to remain elevated, which could make bonds a more important part of the 60/40 portfolio in the coming years.
Should You Stick with 60/40?
The 60/40 rule might not have the same explosive returns it enjoyed in the post-2008 recovery, but it remains a strong strategy for retirement planning, especially for investors seeking balance between risk and return. As bond yields rise and stocks face headwinds due to high valuations, the 60/40 strategy’s diversification benefits are more relevant than ever.
For those nearing retirement or already retired, the 60/40 approach offers a way to generate income while reducing risk in an uncertain market. While there are no guarantees, the strategy continues to perform reasonably well compared to other, more speculative investment approaches.
Final Thoughts
The 60/40 portfolio has proven to be a resilient strategy for long-term investors, even in the face of challenges like those seen in 2022. As the market environment shifts in 2024, bonds are becoming more attractive once again, and the 60/40 rule is regaining its place in many retirement portfolios.
In the coming years, investors can expect a more balanced contribution from both stocks and bonds. While stocks may deliver more modest returns, the stability and income from bonds could offer significant support for a diversified retirement portfolio. The 60/40 rule may no longer be the high-flying strategy it once was, but it is far from obsolete. It remains a reliable, time-tested approach for investors seeking a balanced, lower-risk investment portfolio.