Vanguard: Like the phoenix, the 60/40 portfolio will rise again

John Zeltmann |

November 15, 2022

This article speaks to concerns that some investors have due to the performance of both the stock and bond markets in 2022. As noted by Vanguard1, “…market, economic, and geopolitical conditions all appear fraught. Inflation is hitting 40-year highs, the Federal Reserve is sharply reversing monetary policy, the pandemic hasn’t gone away, and supply chain woes have been exacerbated by COVID-19 lockdowns in China and Russia’s invasion of Ukraine…Not surprisingly, this perfect storm of negative market drivers has pushed stock and bond prices south in lockstep, impairing the normal diversification of risks in a balanced portfolio.”

Stock-bond diversification in historical context: “Brief simultaneous declines in stocks and bonds are not unusual…Viewed monthly since early 1976, the nominal total returns of both U.S. stocks and investment-grade bonds have been negative nearly 15% of the time. That’s a month of joint declines every seven months or so, on average.”

“Extend the time horizon, however, and joint declines have struck less frequently. Over the last 46 years, investors never encountered a three-year span of losses in both asset classes.” For portfolios comprised of 60% stocks and 40% bonds, “one month total returns were negative about 14% of the time, or once every seven years or so, on average.” (Losses were mainly due to the fact that stocks are more volatile and comprise the larger percentage of a 60/40 portfolio.)

The math behind 60/40 portfolios: While some may decry the death of the 60/40 portfolio due to its performance year-to-date, it’s important to remember:

  • “The goal of the 60/40 portfolio is to achieve long-term annualized returns of roughly 7%. This is meant to be achieved over time and on average, not each and every year. The annualized return of 60% US stock and 40% US bond portfolio from January 1, 1926, through December 31, 2021, was 8.8%.” (The aforementioned goal of a 7% return is lower than historical average returns due to the fact that projected returns for equities markets over the next 10 years are slightly lower as a result of the 2009-2020 bull market. In other words, a lengthy period of high returns is typically followed by a period of lower returns, and vice versa.)
  • “The average return can still be achieved if periods of negative returns (like this year) follow periods of high returns” (like the past three years).
  • “On the flip side, the math of average returns suggests that periods of negative returns must be followed by years with higher-than-average returns.” (In fact, lower performance this year helps to explain why the projected 10-year outlook for a 60/40 portfolio has actually increased from the end of 2021.)
  • “Market timing is extremely difficult even for professional investors and is doomed to fail as a portfolio strategy…Chasing performance and reacting to headlines are doomed to fail as a timing strategy every time since it amounts to buying high and selling low.”

No magic in 60/40 but in balance and discipline: “Prominent and useful as a benchmark though it is, 60/40 is not magical…The broader, more important issue is the effectiveness of a diversified portfolio, balanced across asset classes, in keeping with the investor’s risk tolerance and time horizon. In that sense, 60/40 is a sort of shorthand for an investor’s strategic asset allocation, whatever the target mix.”

“Whatever one calls a target asset mix and whatever one includes in the portfolio, successful investing over the long term demands perspective and long-term discipline. Stretches like the beginning of 2022 – and some bear markets that last much longer – test investors’ patience.”

“This isn’t the first time the 60/40 and the markets, in general, have faced difficulties – and it won’t be the last…Like the phoenix, the immortal bird of Greek mythology that regenerates from the ashes of its predecessor, the balanced portfolio will be reborn from the ashes of this market and continue rewarding those investors with the patience and discipline to stick with it.”


1 Aliaga-Diaz, Roger. “Like the Phoenix, the 60/40 Portfolio Will Rise Again.” Vanguard, 1 July 2022.
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