Why the 60/40 portfolio remains important

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Oscarlyn Elder (00:07):

Hello, I'm Oscarlyn Elder, co-chief investment officer for Truist Wealth.

Wasif Latif (00:12):

Hi, I'm Wasif Latif, managing director of Portfolio and Market Strategy at Truist Wealth.

Oscarlyn Elder (00:18):

Investors have been through a roller coaster market since 2020. And in the first half of 2022 investors experienced an unusual occurrence: both stocks and bonds have experienced negative returns. That downturn has led some investors to question whether their investment allocations could still help them meet their long-term goals and let them sleep at night. Additionally, some financial pundits have called for the demise of one of investing's mainstays, the 60/40 portfolio. It's been the quintessential representative of a balanced investment allocation, holding 60% of the value of a portfolio in stocks and 40% in bonds. These two asset classes, stocks and bonds, have historically been a dynamic duo. And in our view, the 60/40 portfolio isn't broken. Holding a mix of asset classes remains important for investors.


Wasif, let's start with the longstanding success of the 60/40 portfolio. What's the context that has historically made the 60/40 portfolio successful?

Wasif Latif (01:27):

Well, you were spot on with the comment that they're a dynamic duo. Stocks, historically, have been a great way of getting growth in the investment portfolio. They are shares of ownership in public companies. Bonds, on the other hand, are income providers in a portfolio. They tend to be stable. And when you combine them, they complement each other because when stocks tend to zig, bonds tend to zag, and vice versa. A combined portfolio of stocks and bonds has been an elegant strategy to harness those diversification benefits. Since 1926, a portfolio allocated 60% to stocks, 40% to bonds has been positive in 75 out of 97 calendar years, a 77% success rate.

Oscarlyn Elder (02:15):

I mentioned that the market has been a roller coaster since 2020. How has that impacted the 60/40 portfolio?

Wasif Latif (02:23):

So since 2020, the portfolio has done well, but let's break it down year by year. In 2020, the Federal Reserve lowered [the] fed funds rate in response to the pandemic, and as a result, both stocks and bonds did really well. In 2021, both stocks and bonds continued to do well as interest rates remained low. In 2022, in response to the higher than expected inflation, the Fed had to raise interest rates, which put pressure on both stocks and bonds, and as a result, they both underperformed. And that has put the 60/40 portfolio in a challenging position this year.

Oscarlyn Elder (03:01):

Wasif, have we experienced this challenging environment before?

Wasif Latif (03:04):

Yes. Rising rates negatively impacting bond prices might be a concern for investors. However, even in the 1970s, when rates rose dramatically, the 60/40 portfolio averaged over a 7% return.

Oscarlyn Elder (03:20):

What's the bottom line we should consider about the 60/40 portfolio?

Wasif Latif (03:24):

Diversification works. It can help reduce the chances of experiencing severe losses in your portfolio. In turn, that can help keep you from making emotional decisions. And then lastly, it can help you potentially achieve the growth in your portfolio to meet your goals.

Oscarlyn Elder (03:41):

So while negative markets can be painful and drive pessimism, long term we expect a blend of complementary investments to maximize returns for given levels of risk.

Wasif Latif (03:51):

That's correct. It's helpful to see the relationship of different asset classes like stocks and bonds through the context of a longer-term time horizon, that timeframe that most investment and financial plans are built upon.

Oscarlyn Elder (04:04):

So you should stay patient, disciplined, and don't overreact. A Truist advisor can support you on this journey. They understand your goals, can help you put stressful market environments into context, and together, you can make prudent adjustments to your investment strategy.

Oscarlyn Elder
Co-chief investment officer
Truist Advisory Services, Inc.

Wasif Latif
Managing director of portfolio strategy
Truist Advisory Services, Inc.

While some financial pundits have called for the demise of one of investing’s mainstays—the 60/40 portfolio—we believe this mix of stocks and bonds isn’t broken. Here’s why maintaining diversification is essential for investors to achieve their goals.

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