In down markets, you’ll often hear that the old rules of investing no longer apply. But they usually still do.
One notorious example: In August 1979, amid a weak period for stocks, BusinessWeek published a cover story titled “The Death of Equities.” At that time, the S&P 500 was below 500. But in July 2022, the index was above 4,100—a return of more than 11% a year when you include dividends that are reinvested.
In 2022, another turbulent time in the market, some experts questioned the wisdom of maintaining a portfolio mix of 60% stocks and 40% bonds. This strategy has been a cornerstone of portfolio management for decades. And Wasif Latif, managing director of portfolio and market strategy at Truist Advisory Services, Inc., believes it still should be.
“There are a lot of questions about it, but we don’t think the 60/40 portfolio is dead,” he says. His conclusion is based on recently published research with Truist Advisory Services, Inc., colleagues Shelly Simpson, senior investment strategy analyst, and Evan Daugherty, investment strategy analyst.
The term “60/40 portfolio” is just shorthand for a strategic mix of stocks and bonds. Stocks are generally riskier than bonds, and depending on your circumstances, time horizon, and goals, it might make more sense to own 70% stocks and 30% bonds or 50% stocks and 50% bonds.
A time-tested strategy
The 60/40 portfolio is effective for many investors because they can benefit from the harmonious historical relationship between stocks and bonds, Latif explains. When stocks go up, bonds tend to go down, and vice versa.
The key is that over the long term, both stocks and bonds have provided positive returns. “Both stocks and bonds tend to move in a positive direction,” Latif says. That has been the case in 75 of the past 97 calendar years. “But when there’s volatility, bonds can hold up better than stocks.”
As a result of this diversification, investors can make progress toward their financial goals in most market conditions. “Even in the 1970s, a bad time for both stocks and bonds, there was a positive return for the 60/40 portfolio” of about 7% annually, Latif says.
But in 2022, we saw stocks fall into bear market territory and bond prices drop. Since 1926, stocks and bonds have both been negative for the year only three times, including in 2022.
Still effective, with a range of options
Regardless, some experts have questioned the future of the 60/40 portfolio because they’re concerned that stock and bond returns might not be good enough in the future. An alternative strategy might include owning precious metals, real estate, and commodities.
But the Truist research team believes that the case for the 60/40 portfolio is intact. Bond yields—the interest rate you receive as the bondholder—have increased and will provide more income to help portfolio returns. “While the journey to higher rates has been painful for bonds, we believe these more productive rates provide greater ballast and should support the historical relationship that has benefited the 60/40 portfolio,” the team’s recent study states.
Another point in favor of a stock/bond mix is that investors have a wide range of choices within these asset classes. Stocks range widely in their risk profiles and growth potential, Latif points out, and investors can add higher-risk, higher-growth stocks to the stock portion of their portfolio, depending on their situation. Bonds also have a wide range of quality, from relatively safe ones issued by the U.S. Treasury to riskier ones that offer higher returns.
Stay in balance
So if the 60/40 portfolio is still an efficient, effective strategy, then maintaining the balance of stocks and bonds you choose is important. Over time, stock price increases and decreases can throw your mix out of whack and turn your 60/40 portfolio into a 70/30 or 50/50 one. If this happens, you might not achieve the return you expect.
To prevent this, periodically rebalance your portfolio by buying or selling stocks and bonds to reach your target mix. It’s best to have a systematic approach, Latif says, and to work with your advisor to monitor your portfolio allocation.
As the Truist research states, by maintaining your target mix in a simple, time-tested 60/40 portfolio, you’ll be diversified and in a position to help meet your long-term financial goals.
More online
Watch a video commentary with Wasif Latif and Oscarlyn Elder, co-chief investment officer at Truist Advisory Services, Inc
Find out the right diversification mix for your financial future.
Talk to a Truist Wealth advisor.