The 60/40 Portfolio: Does It Hold Up Today?

Stay tuned as we explore the past , present and future of this investing strategy .

Your hosts are Bowman Wealth Group financial advisors who , for more than two decades , have provided financial leadership for those they serve .

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So every episode we focus on specific topics or some questions that folks generally share from the financial realm , and today's particular topic is the 60-40 portfolio . Now , what is the 60-40 portfolio ? Does it still work in today's environment ? We're going to flush all of that out today , but before we start , I think it's important to understand what it is .

What is this 60-40 investment portfolio ? Is it broken ? What are some alternatives ? In order to do that , I have to briefly mention some history , really some finance history , and this is know . He argued via this theory that risk averse investors can create portfolios to optimize or maximize expected return based on a given level of market risk .

So you know , maximize based on market risk . Let's talk about that . So what is the 60-40 stock bond split ? For a long time , it was widely accepted that bond prices had an inverse or an opposite relationship with stock prices . So stocks go up , bond prices go down , but the bond yields rise .

Go down , but the bond yields rise , stock prices go down , bond prices go up and the yields fall . And this is safe to assume , because investors generally retreat from riskier positions when the markets fall and they turn to bonds as an alternative . Right , that was kind of the thought process . Stock market's riskier bonds are safer during these times .

So because these bonds offered higher yields when their prices are lower , it was seen as a safer bet . Now , as the market bottomed out , bond prices would peak and investors would jump back into the stock market at that time . So stocks rise , bond prices fall and their yields climb back up .

So essentially , the assumption was that stocks and bonds created this balance beam of sorts .

So the consensus is that this is a relatively low risk strategy that may work really well for people that are later in their careers , you know , pre-retirees and those nearing retirement , because this is a low risk thing so that's of greater importance at that point in your life , since the bull markets usually last longer than bear markets .

60% of the portfolio is in stocks in this situation . Right , that's where the 60 comes from and that would provide you a nice upside gain during those bull market years . Right , given that they last a little bit longer than bear markets .

And the other 40% that 40 , that part of the portfolio would offer you a little bit of upside and yields during those bear markets . So we're kind of covering our bases there . So sounds great . What went wrong ? Well , in late 2010s , something interesting started to happen to the bond and stock markets .

The markets and the economy both came out of the 2008 global financial crisis completely . However , interest rates were kept pretty low by the Federal Reserve for an extended period of time , were kept pretty low by the Federal Reserve for an extended period of time , and the Federal Reserve chair at the time , Janet Yellen , made that decision to keep them low .

Some economies that were seeing extended periods of low economic growth even after the crisis introduced negative interest rates , which is crazy . Some financial regulation became so strict after 2008, . There was a worry that if interest rates were to climb back up , there'd be too much pressure on the financial health of the overall economy .

So the result was that stocks continued to rise while bond values rose right along with them , and this , of course , blurred that inverse relationship between stocks and bonds that everybody was so used to . So when you think about this , this is great for people who had 60-40 portfolios .

You know they were making money on both sides and everything was booming until the economic uncertainty came about , meaning that that low risk strategy wasn't as low risk anymore . So when interest rate hikes are needed to fight inflation which we're seeing now , as of recent years , you know bonds get cheaper and the stock market falls .

Due to businesses facing higher costs of borrowing , it's not as easy to borrow money . Essentially , that inverse relationship between the stocks and the bonds gets completely destabilized , making this balance beam that we referenced of that 60-40 portfolio not the case anymore .

So , although there should be a return to this inverse relationship between the stocks and the bonds , there's really no telling when or if it may come back . And this may be great during the bull market years , as I mentioned , but of course , during recent years , this is doubly costly , right ? We're seeing that now .

2022 , just a couple years ago was a unique year for bonds . They experienced their worst year historically as the Fed was aggressively raising interest rates to battle the high inflation , and you know we're still seeing the effects of that now . But think back to 2022 . Equities in the stock market had a bad year . Bonds were having a bad year .

The traditional playbook said to move more into bonds . Right , move our equities into bonds , which were previously seen as safe investments . In tough times in the economy , this wasn't a viable option in 2022 , right , because both were having a not so great year .

So , to use an analogy , we certainly couldn't move from a hot frying pan to another hot frying pan and , as a result , folks needed to look elsewhere for more conservative alternatives .

Now many advisors have alternative options or strategies that can provide similar diversification to this traditional 60-40 portfolio split , and these are ones that may not include such direct exposure to bonds .

So some bond alternatives may include , maybe private equity funds , fixed index annuities , fias or other alternative investments that can become the other side of that balance beam that was expected to be achieved by the traditional equities bond splits .

So when you think about rebalancing your portfolio , yeah maybe it could be a smart decision , but what are some things we should be careful of and watch out for when we're performing a rebalance ? Well certainly tax implications right .

To rebalance Well certainly tax implications right If this is , say , it's a non-qualified account , meaning a non-retirement account , not a 401k or an IRA . Want to be aware of taxable events ? and just making sure that we're cognizant of trading out of things that maybe are up or down . So just being aware of that Penalties , right .

Maybe part of our rebalance includes a withdrawal from retirement accounts of some kind . We just want to make sure we're aware of how am I going to rebalance ? I think another thing is just not being too hasty .

So if your whole savings plan was in a 60-40 portfolio and you shift it all to a new plan , well , there's certainly no guarantee that that new plan is going to be better . If your financial plan is one-dimensional , it's all in this 60-40 , that's not your biggest issue . The 60-40 strategy isn't your biggest problem there .

It's really the lack of a holistic financial plan that addresses all of your financial needs and goals . So , listen , it's easy to stick to what you know , and sometimes we know that it's best to go for what works rather than gamble on a new thing . But when that old way of doing things stops working , it can be costly to hang on to in terms of a strategy .

When it comes to your 60-40 financial plan , the downside risk of that generic plan maybe ends up costing you more than you want to in terms of your hard-earned savings . And when you think about how costly that downside is .

You may not want to risk your retirement finances like that , especially when there are some solid alternatives that a financial professional can help you with and can help you implement . So , again to our listeners , this has been certainly a high-level look at the traditional concept of the 60-40 portfolio split .

But again , we're just scratching the surface here and if you want to dive deeper into this topic , I encourage you to keep an eye out for future podcasts . Keep an eye out for our newsletters we send out biweekly , or ask to discuss this with your financial advisor If anything that you heard here resonated with you today .

Maybe you've got comments , maybe you have questions or you just want to dive deeper into your particular situation . Shoot us an email and that email address again is ask at bullmanwealthcom . That's A-S-K at bullmanwealthcom . I want to thank you all again for listening , regardless of the podcast platform you're tuning in from .

We certainly appreciate you joining us and tuning in . We appreciate you , we appreciate your reviews , your feedback and , most of all , we appreciate you for giving us your most precious asset your time . Join us next time on your financial compass .

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