In Defense of the 60-40 Portfolio

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Noble Prize winners and “Modern Portfolio Theory” pioneers Harry Markowitz and William Sharpe developed what we know today as the 60-40 portfolio. This strategy consisted of a hypothetical 60 percent allocation to equities and a 40 percent allocation to fixed income. For years, it was the gold standard for portfolio construction.

The future of this investment strategy has been a hot topic for the last couple of years as bonds have come under pressure and equity markets have been volatile. And even with the relatively positive returns of the last several months, it generates questions and debate. Over the last couple of years, the role of fixed income in portfolios has been a subject of debate and whether there is a better answer to the question of “What is the best all-weather portfolio going forward?”

To decide whether the 60-40 portfolio is still viable, we must understand how we arrived at this point. The short answer is a 15-year period—defined by historically low interest rates followed by two years of a rapid rise in rates—has led to two years of challenging fixed income returns. No one would consider these moves in interest rates as the best-case scenario for the 40 percent allocation of the portfolio made up of various bonds or for a large swath of the equity markets.

A Look Back

For 42 years, starting at the beginning of 1980 and ending on December 31, 2021, the 60-40 portfolio outperformed with lower volatility than its components.

60 40 portfolio

A 60/40 allocation is a hypothetical allocation represented by a blended index of 60% stocks (Russell 3000 Index) and 40% bonds (Bloomberg U.S. Aggregate Bond Index), for illustrative purposes only. All indices are unmanaged, and investors cannot invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.

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