What are the pros and cons of a simple stock and bond portfolio consisting of two funds or ETFs? Given U.S. stocks have significantly outperformed the rest of the world over the past decade, is there even a role for non-U.S. stocks in your investment portfolio?
Topics covered include:
- How have 60/40 and similar portfolios performed over the long-term
- What are the advantages and disadvantages of a 60/40 portfolio
- What is the expected return of a 60/40 portfolio and what should be included?
- What has contributed to U.S. stocks outperforming non-U.S. stocks over the past decade
- Why have emerging markets stocks done so poorly
- What has to happen for U.S. stocks to continue to outperform non-U.S. stocks
Show Notes
BlackRock vs. Goldman in the Fight Over 60/40 by James Mackintosh—The Wall Street Journal
Battered 60-40 portfolios face another challenging year by Adrienne Klasa—Financial Times
The case for the 60/40 portfolio in equities and bonds by Erin Browne—Financial Times
Investors wonder if the 60/40 portfolio has a future by Michael Mackenzie—Financial Times
Has the tried and tested 60/40 strategy soured? by Maya Bhandari—Financial Times
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 420. It’s titled “Does a 60/40 Balanced Portfolio Still Work?”
What Are 60/40 Portfolios?
Back in the ’90s when I first became an institutional investment advisor, we talked a lot with clients about 60/40 portfolios, 50/50, 70/30. When we talk about a 60/40 portfolio, we’re talking about a portfolio, a balanced portfolio that has 60% in stocks, 40% in bonds, and that was sort of a standard portfolio back in the 1990s.
As we worked with clients, we might introduce non-US stocks to them, small-cap stocks to them, but they were fairly simple portfolios, diversified in terms of the number of holdings. Oftentimes we might use index funds, partner with some active strategies.
But then as we got into the 2000s, we started introducing additional asset classes to our clients. It could be public Real Estate Investment Trusts, non-investment grade bonds, private strategies such as leveraged buyout funds, private real estate, even some hedge funds. These additional complications may or may not necessarily have been better, particularly if as investors we don’t understand what we’re investing in.
At the beginning of this year, I saw numerous articles in the financial press regarding 60/40 portfolios, such as in The Wall Street Journal a piece titled “Blackrock versus Goldman and the fight over 60/40.” Another in the Financial Times, “Battered 60/40 portfolios face another challenging year.”
I’ll admit, I don’t spend a lot of time thinking in terms of 60/40 portfolios, or 50/50 portfolios. We do have some static model portfolio examples at Money for the Rest of Us Plus that are 60/40 or 70/30, but generally speaking, my portfolio for example I don’t consider 60/40 Because I have numerous other asset classes. The adaptive model portfolios that we have, have some additional asset classes, but it is a straightforward way to structure a portfolio, and it’s been incredibly successful, except it wasn’t last year.
60/40 Portfolio Performance
According to Blackrock, the typical 60/40 portfolio lost 17% in 2022. That was the worst performance since 2008. And depending on the mix, the type of stocks, it could have been the worst since 1980.
Sharmin Mossavar-Rahmani, who’s head of investment strategy at Goldman Sachs, said “It happened, losses on both stocks and bonds.” He says “It’s happened in the past, it will happen in the future, but it’s rare.” Last year, bonds lost over 10%, and stocks in many cases lost over 20%. Goldman Sachs calculated that a balanced portfolio of US stocks and bonds lost money over a 12-month period just 2% of the time going back to 1926, losses on both stocks and bonds.
If we go back to 1980 and look at a balanced portfolio, a 60/40 portfolio made up of global stocks and global bonds, it’s only had six negative year returns, calendar years, since 1980. Most of the years it’s been positive, with the average 60/40 portfolio returning 6% to 7% between 1999 and 2022.
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