Stock market investing is often described as long-term, not to be disrupted in reaction to short-term economic influences. A traditional investing strategy supports crafting a mix of stocks and bonds (or similar fixed-income investments) designed with consideration to your risk appetite and then left alone. combining potential for growth with stability, you may want to develop a 60/40 portfolio. That means you have sixty percent of your stock holdings and the balance in fixed-income instruments like bonds. The foundational hypothesis for the 60/40 portfolio is that the stocks will appreciate while the bonds reduce volatility to help manage short-term losses.
Over time, this mix returns an average of nine percent annually. Since the 2008 trough of the Great Financial Crisis to 2021, such a combination has offered an average of 11.5 percent growth for the investor.1 But 2022 upended many commonly held axioms regarding this portfolio mix.
Bonds suffer when inflation is higher since interest rates are fixed and may not keep up with inflationary price hikes. Since the U.S. economy has become accustomed to low-interest rates for most of the last 40 years, bond prices have kept increasing, with returns often beating stocks.2
In 2022, unfortunately, 60/40 portfolios suffered 15 percent losses, on average.3 That’s the worst performance since 1937, primarily due to the worst results for U.S. Treasuries since 1801, according to asset management firm Leuthold Group. In prior stock market downturns, investors could rely on the stability offered by bonds, but now bonds may compound the losses.
Even with future interest rate increases likely through this year, and the extreme losses experienced in 2022 by a typical 60/40 allocation, investors should not despair. While conventional wisdom holds that stocks typically go up, we know that’s not always true. Similarly, while bonds are usually lower-risk, that’s not universally accurate. That doesn’t mean investors shouldn’t trust the cushioning value of fixed-income investments like long-term treasuries. Sebastien Page, head of global multi-asset management at T. Rowe Price, points out that as we advance, future bond yields actually benefit from the damage they suffered in 2022. “We’ve already had 2022,” Page stated. “We’ve had the interest-rate shock. That’s in the price.”4
Still, Page and other experts suggest that investors consider some tweaks. For example, Page recommends directing at least five percent of your stock selections to shares in industries that may benefit from persistent inflation. He suggests energy, real estate, and natural resources. Similarly, Matthew Wright, President of Disciplina Capital Management LLC, recommends slightly shifting a traditional 60/40 composition to a 60/30/10 variation. In this scenario, 60 percent is focused on growth, 30 percent is invested in fixed income, and 10 percent is directed toward assets that blunt the impact of inflation, potentially including real estate.
Respected investment theorist Peter Bernstein (deceased) called the 60/40 portfolio the “center of gravity” for long-term investors. He reminded investors that its design is long-term and makes sense for people who want to assume some risk but not enough to lose sleep over. Sometimes, you have to trust the process.
1JP Morgan Asset Management, Meera Pandit. “Is the 60/40 dead?” July 20, 2022.
2Wall Street Journal, “It’s the Worst Bond Market Since 1842. That’s the Good News.” Jason Zweig,https://www.wsj.com/articles/its-the-worst-bond-market-since-1842-thats-the-good-news-1165184
3bloomberg.com: Sell-Everything Market Sends 60/40 Funds on Worst Run Since 2008” March 15, 2022
4Wall Street Journal, “Your Investing Strategy Just Failed. It’s Time to Double Down.” Jason Zweig, https://www.wsj.com/articles/asset-allocation-60-40-portfolio-11673020720?st=jvbwsuo8zwbxiwc&reflink=article_email_share, January 6, 2023