A 60/40 portfolio traditionally offers a balance of growth opportunities and managing risk. The 60 refers to a sixty percent composition of stocks in the portfolio, balanced by forty percent bonds. The theory is that the stocks would increase reliably over time, allowing the investor to increase their holdings, while the bonds would provide a hedge for the times when the stocks declined. Generally speaking, this strategy has paid off for patient investors, with long-term average returns of nine percent.
Indeed, since the low point of the Great Financial Crisis, a 60/40 portfolio has enjoyed an 11.5 percent annual return, according to Meera Pandit, Global Market Strategist with JP Morgan. But performance so far in 2022 is different, with a first-half decline of just over 16 percent. Pandit points out that substantial drops are not uncommon. In the last forty years, dips of ten percent or more within a year have happened nine times. However, in five of those instances, the returns still ended the year in positive territory. In all but one of the nine, returns the following year made up the difference and more, averaging 17 percent. 1
Is this time different?
This year, the uncertainty is enhanced by the rapid rise in interest rates, which may continue as the Federal Reserve fights inflation while hoping to avoid stalling the economy. The rate increases have spread the losses from stocks to bonds, affecting bond yields, dividends, and earnings all at once. Chris Brightman, chief investment officer at Research Affiliates, predicts lower returns for the near future than we have seen as a historical average. Similarly, Izabella Goldenberg, U.S. head of portfolio strategy for Goldman Sachs Asset Management, stated that investors need to establish realistic expectations for returns now while remaining "diversified for the long term." 2
Should I change my investing strategy?
Crafting and adjusting your investment strategy is a process that includes consideration of your financial goals, the assets you have available for investment, and your appetite and tolerance for risk. In general, investments with higher risks have higher potential rewards. However, those potential rewards come with higher potential losses. Your risk tolerance indicates how much risk you will accept in pursuing a targeted return.
Your risk tolerance depends on both your risk appetite and your risk capacity. Your risk appetite may depend on how much disposable income you have, which is your capacity. You can't afford to take chances if your available funds are fully committed to paying for necessities. On the other hand, if you have assets beyond what you need for expenses, you may be able and willing to take more risks to seek a higher return.
What about real estate?
Real estate may have a place in your portfolio, either as a direct investment or through securities like REITs (Real Estate Investment Trusts) and fractional ownership opportunities, including Delaware Statutory Trusts. You can learn more about both from your investment advisor.
1JP Morgan Asset Management, Meera Pandit. “Is the 60/40 dead?” July 20, 2022.
2 bloomberg.com: Sell-Everything Market Sends 60/40 Funds on Worst Run Since 2008” March 15, 2022
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Examples are hypothetical and for illustrative purposes only. Withdrawal strategies should take into account the investment objectives, financial situation and particular needs of the individual.
