An Outline Of The 60/40 Portfolio Allocation; Is The Method Still Viable? Writer: Riya Mall. Date Written: 03/11/2024

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The once-popular portfolio with a 60/40 equities to bonds allocation has declined by 60 basis points. This was a reliable strategy that had been popular for decades, significantly in the past where there was a clear negative correlation between bonds and equities. The inverse relationship between bonds and equities meant that bonds could hedge against the potential losses from equities which in then creates stability in the portfolio. However, in the recent years, there has not been an inverse relationship between equities and bonds with it even becoming positive in 2022. This was caused by many reasons including high inflation and major world events such as Covid-19 and Russian invasion in Ukraine.

In 2022 particularly, the portfolio was performing its worst since the early 90s with both equities and bonds having reduced returns. This volatility was due to monetary policies; central banks adjusting the interest rates whilst government spending increased. Usually when inflation increases, central banks will raise interest rates to lower inflation. The fixed income market became volatile, and values of bonds plummeted. This meant that bonds could no longer hedge against equity-led losses. Whereas in the past bonds would be half as volatile as equities.

Investors will have to find new ways to deal with these issues that the 60/40 equities to bonds portfolio is facing. One way is through investing into alternative investments such as private equity, real estate, private credit to further diversify the portfolio and for it to deal with the pressures of inflation. Blackrock have suggested ways of examining the alternatives that diversify your portfolio, diversifying, durable, defensive. Investors should assess the correlations between assets in the portfolio and whether they have consistent returns. It needs to be resilient during uncertain market conditions where other asset classes are losing out. Using these questions to examine, alternative investments can greatly enhance the traditional 60-40 portfolio.

Although there are various opinions on whether this longstanding portfolio is returning. As mentioned before there have been discussions on investing into alternative investments as it is less inflation linked. The traditional approach carries risks in periods of inflation. Additionally, economists at Morgan Stanley have mentioned that since there is a growing old population, there will be lower returns has retirees will opt for lower risk investments such as fixed income assets rather than riskier assets such as equities. The traditional approach carries risks in periods of inflation. Despite the decline, there is still a positive sentiment with the portfolio due to the risk and return balance and its longstanding track record. To back it up as of September 2024, it has a 29.7% overall return since year-end 2022. The question remains whether 60/40 portfolio is making a comeback?

References:

• Vanguard (2024) A globally diversified portfolio of 60% stocks and 40% bonds. Available at: https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/global-60-40-portfolio-steady-as-it-goes.html#:~:text=A%20globally%20diversified%20portfolio%20of,the%20viability%20of%20this%20strategy.&text=Some%20commentators%20even%20declared%20the%20old%20standby%20dead.

• BlackRock (2024) 60/40 portfolios and alternatives. Available at: https://www.blackrock.com/us/individual/insights/60-40-portfolios-and-alternatives.

• Morgan Stanley (2024) What is the future of the 60/40 investment portfolio?. Available at: https://www.morganstanley.com/ideas/60-40-investment-portfolio-future.