If 60/40 portfolios had a mind of their own, they would perhaps feel like Mark Twain when he read his own premature obituary.
It seems to be the flavor of the autumn: Bank of America called it “the end to 60/40;” Goldman Sachs suggests losses on such portfolios may reach 10%. You get the idea.
If the concept of spreading risk to smooth available market returns by splitting asset allocation between stocks and bonds has been the mainstay of investors for so long now, so are reports of its impending demise. For instance, Bank of America made the same call back in 2019. How has that call fared? Suffice to say that since the end of that year, a model 60/40 portfolio has run up a stunning 27%.
Bloomberg News
That is not to say that the arguments for caution against blindly following a rote strategy aren’t valid. Far from it. With U.S. market capitalization exceeding the economic output of the five biggest economies, the average stock portfolio is presumably a far longer-duration asset now than it has been in anyone’s experience, meaning it’s more sensitive to changes in interest rates.
With global central banks on the cusp of — or already on a path toward — tightening, both bonds and stocks will feel the pinch. The question is whether any tightening will be so vigorous and violent that it is likely to spell gloom and doom to the strategy.
That may have been a valid position back in the day when central banks ran policy looking at main street. These days — and unfortunately so — what happens on Wall Street is probably as important in setting policy makers’ agenda as what happens in the real economy. In other words, with markets always on central banks’ radar, we are only likely to get measured, gradual and baby steps to anything that could be remotely termed a normalization process.
All of which suggest the 60/40 portfolio may remain in rude health for a while longer, much like Mark Twain did after initial reports of his demise.