Is “the 60/40” dead?

Reversion to the mean – (or running from it)

For many investors “mean” describes how they felt this year when they open their investment statement.  In my experience many investors don’t look past the first page.  Especially when their account value drops.  For those who dared to venture beyond the first few pages they likely saw the simultaneous correction of the stock and bond markets, something not seen in more than 50 years according to a report from Swiss Bank Mirabaud.  This year will likely join the ranks of 1931,1941 and 1969 to end the calendar in simultaneous correction.  Thankfully, these events are rare and have never happened in consecutive years.

It’s only math

This leads me to the mathematical concept, “reversion to the mean”. Theoretically when a system of numbers departs from a long-standing pattern eventually the system will return to its normal range. In other words, an extreme event is likely to be followed by a less extreme event.  In this case the long-standing pattern can best be described by Barry Gilbert, asset allocation strategist for LPL Financial. Since 1976, the S&P 500 has had a negative calendar year return eight times. Each of those eight times, the US Aggregate Bond Index was higher, with an average total return of 6.7%, said Barry in an interview with Market Insider.

Is 60/40 dead?

In the world of portfolio management “the 60/40” is shorthand for 60% in stocks and 40% in bonds. This asset allocation appears to have the right blend of opportunity and risk management for many moderate investors. Countless reems of paper have been sacrificed to printers throughout the investment community with studies focusing on the historical performance of the balanced portfolio. Namely, “the 60/40”.  Vanguard posted on their website (yay, save the trees) the “historical index risk/return (1926-2019)” of several different allocations. The unescapable conclusion is that adding bonds to your stock portfolio reduces risk.  For the most part, this didn’t work in 2022.  Meera Pandit, Global Market Strategist with J.P. Morgan Asset Management also asked, “is the 60/40 dead?”. She writes, “Since 1980, there have been nine instances in which the 60/40 fell more than 10% within a given year.” She also noted that “In eight of the nine instances, returns the following calendar year were positive, with an average return of over 17%.  In the final analysis I believe “the 60/40” is not dead, it is sick and on the mend.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance referenced is historical and is no guarantee of future results.

All indices are unmanaged and may not be invested into directly.

Investing involves risk including loss of principal.

No strategy assures success or protects against loss.

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