Is the Traditional 60/40 Balanced Portfolio a Good Investment Strategy?
For decades, the 60/40 portfolio was the epitome of the balanced portfolio. The allocation of 60% stocks and 40% bonds has traditionally been seen as an all-weather portfolio, with the volatility of stocks balanced by the more conservative, defensive nature of bonds.
And, historically speaking, this has generally been the case. According to Emelia Fredlick, a senior editor for Morningstar, there has been only one time in the past 150 years that the 60/40 portfolio experienced more pain than the stock market — and it’s now.
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So why is that the case? Does it mean the era of the 60/40 portfolio is over?
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What’s With the Underperformance?
The period from the end of 2021 through 2025 marked the worst bear market for bonds in history, according to Morningstar. In 2022, bond yields were among their lowest in history, per CNBC, meaning prices were the highest. Thus, when the Federal Reserve embarked on its aggressive campaign of interest rate hikes, boosting them from near-zero to 4.25% to 4.5%, bond prices cratered.
While the stock market also took a dive, it has since recovered and gone on to record highs. The bond market, on the other hand, has significantly lagged, in part due to lingering inflation and fear of the effects of tariffs on prices.
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Does This Mark an Opportunity?
Oftentimes, when prices get out of balance in the markets, they find a way of regressing to the mean. Currently, stocks are near all-time highs, while “investors are still coming out of one of the worst bond markets in history,” per Morningstar. This doesn’t mean that a reversal is necessarily in the cards. But it does mean that you should review your investment objectives and risk-reward profile to make sure that your asset allocation remains in line.
If you originally invested your profile with a 60/40 split, for example, it’s entirely possible that it now sits close to 80% in stocks and 20% in bonds. This could expose you to much more risk than you originally intended.
Rebalancing your portfolio could also potentially offer you greater opportunity. If the stock and bond markets revert to the mean, selling stocks when they are high and buying bonds when they are low could be a smart strategic move.
What Are the Risks of the 60/40 Portfolio?
Before 2021, the most commonly cited risk of the 60/40 portfolio was that it limited upside performance. But since 2021, another type of risk has reared its ugly head — the risk that stocks and bonds move downward at the same time.
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