Reports Of The Death Of The 60/40 Portfolio Are Greatly Exaggerated, Part II
By James Picerno | The Milwaukee Company | jpicerno@themilwaukeecompany.com
The warnings in recent years from some analysts that the 60%/40% stock/bond benchmark portfolio is dead haven’t aged well.
Pundits often mistake temporary periods of weakness for the 60%/40% mix and related multi-asset-class strategies as a sign that diversification no longer works.
The recent strength in the 60%/40% benchmark reaffirms that a portfolio of stocks and bonds is still a robust starting point for designing investment strategies.
Five months ago we were skeptical that the 60%/40% stock/bond portfolio’s weak performance during, and soon after, the pandemic was a harbinger of doom for this widely used benchmark for a simple asset allocation strategy. Market results so far in 2025 have only strengthened our view by reaffirming the resilience of this basic measure that tracks returns for asset class diversification.
Recall that numerous pundits in recent years have been advising that the concept of holding a 60%/40% portfolio of US equities and US fixed-income securities had hit a wall. This warning tends to pop up whenever stocks, bonds or both suffer the inevitable bouts of downside turbulence. The latest likely catalyst: the start of interest-rate hikes in March 2022, when the Federal Reserve began tightening monetary policy. Stocks and bonds fell sharply in the wake of that decision, inspiring claims in some circles that the 60%/40% portfolio’s value proposition had failed and was no longer relevant.
In fact, a review of the 60%/40%’s history shows that temporary losses are a semi-regular feature for asset allocation rather than a fatal, permanent flaw. Consider the chart below, which shows the historical results of a 60%/40% mix since 1991, using a set of Vanguard index funds as proxies for US stocks (VFINX) and bonds (VBMFX) that are rebalanced to target weights at the end of each calendar year. The recent run of losses was relatively steep, but not unprecedented
Notably, the 60%/40% strategy has recently rebounded — sharply. But that, too, is par for the course for this strategy after periods of weakness.
No one can guarantee that the 60/40 strategy will remain resilient – a caveat that also applies to every other strategy. What is clear is that the fundamental benefits that arise from diversifying across asset classes reveal an encouraging history in the pursuit of attractive risk-adjusted return.
The basic 60%/40% framework also lays the foundation for more nuanced asset allocation strategies, such as adding property shares, international stocks, commodities, equity factors, and more. The opportunity set, in other words, extends far beyond a simple 60%/40% mix focused on a simple definition of US stocks and bonds.
The underlying logic for holding multi-asset-class and multi-factor portfolios is that markets aren’t perfectly correlated. Diversification doesn’t always work, but in a world where the future’s forever uncertain the allure of asset allocation in one form or another is compelling.
It’s been tempting to think otherwise over the past two years, as US stocks have surged while bonds have languished. But trees don’t grow to the sky and trends don’t last forever. Markets, in short, run in cycles.
Consider how 2025 is unfolding so far: US bonds (VBMFX) are outperforming US stocks (VFINX) year to date. No one knows how long this will continue, but the leadership rotation is yet another reminder that asset class performance is dynamic and so using recent history as a guide to the future comes with caveats.
While it may seem appealing to think that it’s possible to adopt an extreme strategy that favors the asset classes that are rising and exclude those that are falling, in practice few, if any, investors or institutions are capable of excelling through time with such an aggressive approach. Thus the case for remaining diversified across asset classes, perhaps with periodically-revised tilts for certain markets, depending on current conditions and trends.
Meanwhile, citing the periodic setbacks in a 60%/40% portfolio, and other asset allocation strategies, as reasons to dismiss these concepts may be short-sighted and misinformed. Nothing works all of the time in markets. But multi-asset-class portfolios generally tend to succeed over medium- and long-term periods, even if short-term time windows suggest otherwise.
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