Is 60/40 Still a Thing?

The 60/40 portfolio (60% equities, 40% bonds) has been a staple of investment strategy for decades. But did we adopt this approach simply because it was the best we could do with the limited investment options available at the time? While this strategy has generally performed well, it’s worth questioning whether it’s truly foolproof, especially in light of unprecedented economic events.

Here is an example – the overall concept is that you are almost half and half – stocks and bonds – with just a little extra in stocks to give you a boost during the good times. The premise works because usually stocks and bonds have an inverse relationship – one goes up, the other goes down. So in a really bad stock market you can sigh relief because your total portfolio won’t get destroyed, since the 40% part is moving up. Until it doesn’t…

In 2022 stocks and bonds went down together – not at the same rate but still – uh oh.

IF you want to dive into Modern Portfolio Theory and asset correlation, have at it but here are the basics:

• Over 50 years ago a very smart scholar named Dr. Harry Markowtitz proposed that a good portfolio means your overall risk is less than the things in the portfolio – i.e. if stocks went down you will live, same with bonds – because you have some of each.
• Also there are even more very smart people who will design these portfolios for you so that all you need to know is you are fitting within the guidelines of this traditional theory.
• Like everything Modern Portfolio Theory comes with disclaimers, one of which is not all risk can be eliminated – yeah, that’s the thing – nothing is perfect…

One of the things that we cannot eliminate is something you are probably familiar with…INFLATION. So that means that your stocks and your bonds will react to major events that involve inflation, interest rates, oil prices, etc…suddenly this 60/40 thing does not sound like such a sure thing.

WHAT YOU NEED TO KNOW:

• Nothing is a sure thing – keep that in mind – so having some small investments in private equity is no guarantee either
• Always seek professional advice – the traditional 60/40 still may be your best bet, or maybe adding alternatives to the mix works too – everything comes with risk
• The restrictions excluding individuals from participating in certain investments are starting to ease but buyer beware – so many choices, so many unknowns – if you want to dip your toe in the water ask for help
• It is good to just stay informed – and if you have read until this point then consider that box checked!

This doesn’t mean we should abandon the 60/40 approach entirely. Rather, it underscores the importance of understanding the principles behind our investment choices and being open to adjustments when necessary. As the investment landscape evolves, with new options becoming available to individual investors, it’s crucial to stay informed and consider how these changes might impact your portfolio strategy.

Ultimately, the key takeaway is this: while the 60/40 portfolio remains a solid foundation for many investors, it’s not a one-size-fits-all solution. Your investment strategy should be tailored to your individual goals, risk tolerance, and the current economic climate. Stay informed, seek professional advice when needed, and be prepared to adapt your strategy as the financial world continues to change. By doing so, you’ll be better equipped to navigate the complexities of modern investing and work towards your financial goals.