We're Back With the 60/40 Portfolio. Here’s What Experts Think Could Happen Next

The classic 60/40 investment strategy—allocating 60% to stocks and 40% to bonds—has made a notable comeback, sparking debates about its sustainability in today’s economic environment. Whether this balanced portfolio remains effective depends largely on market conditions and economic developments.

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According to Vanguard data, the global 60/40 portfolio has achieved a cumulative return of 27% since the start of 2022 through October 31, 2024. Historically, this strategy benefits from the tendency of stocks and bonds to move inversely, which helps reduce overall volatility. However, that dynamic failed in 2022 when both asset classes declined sharply, leading to a significant drop in the portfolio’s performance and prompting some to declare the strategy obsolete.

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Like any investment approach, the 60/40 portfolio experiences ups and downs. For instance, it plunged to a one-year trailing return of -30% in February 2009, only to rebound with a 37% one-year trailing return by February 2010, according to Vanguard. Despite such volatility, the strategy has delivered strong long-term results, said Todd Schlanger, Vanguard’s senior investment strategist.

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“The 60/40 is really a long-term investment,” Schlanger explained. “Over a 10-year horizon, it has shown remarkable steadiness.” As of October 31, the portfolio had an annualized 10-year trailing return of 6.54%.

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The 60/40 model serves as shorthand for a diversified portfolio, though individual allocations may vary based on an investor’s risk tolerance. Those willing to take on greater risk often allocate a higher percentage to stocks.

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Diversification During Market Rallies

In bull markets, diversification may seem less critical to investors, said Dan Lefkovitz, a strategist for Morningstar’s indexes group. For example, Morningstar’s index representing a 60/40 portfolio is up roughly 15% year-to-date, compared to the S&P 500’s 25% gain. Morningstar offers various indexes with different allocation targets, resulting in diverse returns and volatility profiles, the latter measured by the standard deviation of returns.

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However, during market downturns, diversification can help cushion losses. Lefkovitz noted this effect during the third quarter of 2024. From August 1 to August 5, the Morningstar US Market Index fell 6.28%, while the Morningstar US Core Bond Index gained 1.53%. Similarly, from September 2 to September 6, equities dropped 4.32%, but bonds rose 1.27%.

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“During sell-offs, having assets that zig while stocks zag is crucial,” Lefkovitz said. “Bonds provided that stability.”

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Beyond their stabilizing effect, bonds offer attractive yields, making them valuable for income-seeking investors. However, this correlation doesn’t always hold, as seen in 2022 when rising inflation and interest rates disrupted the usual stock-bond relationship.

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Challenges with Stock-Bond Correlation

Morningstar portfolio strategist Amy Arnott observed that the stock-bond correlation can break down during periods of inflation and rapid rate hikes. In such environments, commodities have historically been a more reliable hedge against inflation.

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“Diversification strategies that worked in the past may not be as effective in the future,” Arnott wrote in a March report. “In a prolonged period of rising rates or above-average inflation, Treasuries and other high-quality bonds may be less reliable diversifiers, though they remain important components of a core portfolio.”

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Inflation and the "End" of 60/40

Bank of America predicts inflationary pressures ahead, which could challenge the 60/40 strategy. Jared Woodard, a strategist at the bank, argued that the world is transitioning from a “2% environment” of low inflation and growth to a “5% world” characterized by higher prices, higher GDP, and elevated corporate earnings.

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This shift, Woodard said, undermines the effectiveness of the 60/40 model. “The assumption that bonds hedge against equity bear markets worked in a ‘2% world,’ but today’s record-high correlations between stocks and bonds make them equally volatile,” he explained. He pointed to the negative returns for both asset classes in 2022 as a warning sign.

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Optimism for the Long Term

Despite these challenges, Lefkovitz maintains that the 60/40 portfolio is still a solid long-term strategy. “It has stood the test of time as a portfolio stabilizer, helping to mitigate stock market losses,” he said. Investors should prioritize high-quality fixed-income assets, such as Treasuries and investment-grade corporate bonds, to maximize the benefits of diversification.

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Vanguard, for example, incorporates investment-grade bonds into its LifeStrategy funds, including the Moderate Growth Fund, which follows the 60/40 model. The fixed-income portion is largely tied to the Bloomberg U.S. Aggregate Bond Index, with 30% of the bonds held outside the U.S. but hedged back to the dollar, Schlanger explained.

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Schlanger remains optimistic about the next decade for the 60/40 strategy. While equity returns may not match those of the past 10 years, he expects bonds to perform better.

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“Returns over the next decade may be slightly lower than the past 10 years,” Schlanger said. “Our outlook is more balanced, with fixed-income returns rising significantly. Equities don’t need to maintain their past momentum for the 60/40 portfolio to perform well in the years ahead.”

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Ultimately, the strategy’s success will depend on economic conditions and the evolving relationship between stocks and bonds. However, its long-term resilience suggests that it remains a valuable option for diversified investing.

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