Will the 60/40 Investment Portfolio Survive and Thrive in 2023?

Traders work on the trading floor at the New York Stock Exchange on Jan. 5, 2023. (Andrew Kelly/Reuters)

News Analysis

In 2022, global financial markets recorded sharp losses in both stocks and bonds, wreaking havoc on investors’ portfolios everywhere, including the conventional 60/40 investment portfolio.

For decades, the 60/40 portfolio—60 percent in equities and 40 percent in bonds—has been the standard practice. This diversified asset allocation aims to minimize risk and generate returns during volatility in the international financial markets. As a result, it has been the go-to strategy for investors who don’t possess a high-risk tolerance but still desire growth potential.

But that didn’t occur last year. Instead, according to data from BlackRock, 60/40 portfolios suffered their worst performance since 1999, posting a loss of 17 percent. This is far from the average annualized return of 8.8 percent between 1926 and 2021. Over the past 90 years, there have been only two calendar years in which equities and bonds posted simultaneous losses: 1931 and 1969 (with a near miss in 2018).

“Negative returns for both stocks and bonds in a calendar year is very rare,” Wiley Angell, chief market strategist at Ziegler Capital Management and lead portfolio manager for the Ziegler FAMCO Hedged Equity Fund, told The Epoch Times.

So was last year’s outcome an anomaly, or is it time to revisit this standard investment portfolio? For some, rumors of its death have been greatly exaggerated. For others, it may depend on one’s situation.

A 2023 Peek at 60/40

Some financial experts argue that this was a once-in-a-lifetime event.

In its 2023 Long-Term Capital Market Assumptions Report, J.P. Morgan Asset Management forecasts an annual return for 60/40 portfolios for the next 10 to 15 years to be 7.20 percent.

“Once again, the 60/40 can form the bedrock of portfolios, while alternatives can offer alpha, inflation protection, and diversification,” the report reads.

Philip Straehl, global head of investment management research at Morningstar Investment Management, expects 60/40 portfolios to deliver returns after inflation of 3.6 percent over the next two decades.

But while returns are anticipated to improve from last year and maintain their upward trajectory, market experts warn that there may be some greater volatility moving forward, according to Leuthold Group, a market research and money management firm.

In the end, Roger Aliaga-Díaz, head of portfolio construction and chief economist at Vanguard, doesn’t believe that the 60/40 portfolio and its different versions are dead.

“Like the Phoenix—the immortal bird of Greek mythology that regenerates from the ashes of its predecessor—the balanced portfolio will be reborn from the ashes of this market and continue rewarding those investors with the patience and discipline to stick with it,” he said in a report.

He may be right. In the opening days of the 2023 trading year, the U.S. Treasury market rebounded and was off to its best start to the year since 2001.

Year to date, the iShares 20+ Year Treasury Bond ETF is up by nearly 6 percent. The iShares Core U.S. Aggregate Bond ETF and the Vanguard Total Bond Market ETF are up by about 2 percent.

The leading benchmark stock indexes are also holding steady in the early days of 2023, with the Dow Jones Industrial Average rising by about 3 percent, the Nasdaq Composite Index increasing by about 6 percent, and the S&P 500 Index increasing by close to 5 percent.

Regardless of how the financial markets perform over the next 12 months, a one-size-fits-all asset allocation of 60/40 “is not ideal for most market participants,” according to Robert Johnson, a professor at the Heider College of Business at Creighton University.

“For instance, someone in their twenties or thirties is best served by a more aggressive allocation (a very small allocation, if any, to bonds), while someone at retirement age is better served by a less-aggressive asset allocation,” he said.

A portfolio of “60/40 has been an historically average asset allocation that is not ideal for most investors.”

But some companies are trying to update the general 60/40 portfolio model.

Eric Leve, chief investment officer at Bailard, a wealth and investment manager with $5 billion in assets, said his firm has been putting together “all-weather solutions” for 60/40 portfolios since the 1970s, be it non-U.S. equities or private real estate assets.

“Over the past several years, we have included additional real asset exposure in the form of alternative energy infrastructure. This can provide another source of income with little correlation to traditional fixed income,” he told The Epoch Times. “We have also incorporated a tactical asset allocation to complement our strategic positioning. This strives to capture more rapid swings in broad market sentiment by investing in a focused group of asset classes.”

Overall, in the coming decade, financial analysts say that investors might need to diversify their 60/40 portfolios beyond the United States and invest for inflation.