Is the 60/40 Portfolio Still a Relevant Option in 2023?

By Brett Gottlieb

It doesn’t take a financial planner to see that the economy has changed in the last couple years. Ideas and strategies that worked in the past have ceased to be recommended options, and new plans have begun to show potential. In the middle of all this is the 60/40 portfolio, which has been a trusted investment strategy for many years, specifically for retirees and moderate-risk investors.

In the aftermath of the Global Financial Crisis, a simple 60/40 mix of U.S. large-cap stocks and investment-grade bonds was a popular choice as equities surged and interest rates plummeted. That’s not the world we live in anymore. In 2022, the 60/40 portfolio had one of its worst years on record, leaving many people anxious about its future.

Even if something worked for you in the past, it’s always a good idea to revisit it—looking through the lens of our current economic climate. Let’s explore some of the pros and cons of the 60/40 portfolio and discuss if it still makes sense in 2023.

The Typical 60/40 Portfolio

The 60/40 portfolio is a traditional investment strategy that utilizes an asset allocation of 60% equities for capital appreciation and 40% fixed income for yield and risk mitigation. The logic behind this strategy is that when stock returns decline, the bond yields will increase to stabilize the portfolio and keep the overall return steady. While this allocation has historically delivered a positive annualized return, last year was one for the record books. The 60/40 portfolio saw its worst performance since 1937 as both equities and fixed income investments plunged by double digits. Despite the poor performance, there are still several advantages to this investment strategy.

Advantages

The 60/40 portfolio has long been used as a retirement investing strategy due to its ability to produce both growth and long-term income. Benefits of this strategy include:

• Consistent Historical Returns: From 1926 to 2021, the 60/40 portfolio produced an annualized rate of return of 8.7%. More recent data from Vanguard suggests the 10-year expected return for the 60/40 portfolio is 6.09% (up from the 10-year expected return of 3.83% in 2021).

• Lower Volatility: Traditionally, the 60/40 portfolio has provided reduced volatility since it is considered a balanced portfolio. The stability of the fixed-income investments generally counterbalances the risk associated with equities.

• Easy to Set Up & Maintain: A 60/40 portfolio can be relatively easy to set up, especially when using ETFs and index funds. All you need is annual rebalancing to maintain the target asset allocation, making it an appealing strategy for those who want to keep their portfolio simple.

Disadvantages

Despite its historical performance, past results do not predict future returns and the 60/40 portfolio does have a few flaws.

• Reduced Diversification: One of the main flaws in this strategy happens when stocks and bonds are highly correlated. This can cause the stocks and bonds to decline together instead of moving in opposite directions, thus reducing traditional diversification benefits. This can be a huge challenge for all portfolios, but it’s particularly risky with the 60/40 since the allocation between stocks and bonds is nearly equal.

• Lower Returns: While a 60/40 portfolio has historically provided stability and reduced risk, it typically generates lower returns than an all-equity portfolio. The larger allocation to income-producing assets like bonds means less of your portfolio is invested for growth.

• Inflation Risk: Inflation is a serious threat to the 60/40 portfolio. Not only does it eat away at returns from growth-oriented assets like stocks, but it also erodes the value of the bond portion of the portfolio over time. With extended periods of high inflation, the 60/40 portfolio can experience a significant loss in purchasing power.

Economic Considerations for 2023

Despite what we saw in 2022, there are several reasons to suggest the 60/40 portfolio may make a comeback in 2023. First, there is historical evidence to show that the 60/40 portfolio often rebounds with strong positive returns in the years after a downturn.

Not only that but inflation has decreased steadily over the last three months, down to just 5% in March 2023. As one of the biggest risks to the 60/40 portfolio, declining inflation is a huge relief that could improve the outlook for this strategy going forward.

Lastly, with the Fed expected to slow its interest rate hikes, there could be less pressure on bonds in the coming months and a more normalized correlation between the equities and fixed income sides of the 60/40 portfolio. With a lower correlation between stocks and bonds, the traditional diversification benefits of a 60/40 portfolio could be restored.

Take Action Now

Taking an extra hard look at your investments is always a good idea, but it has become even more important after the rollercoaster of the last several years. The great news is you don’t have to make sense of all the data by yourself. Our team would love to work with you to explore the right options to help create a successful plan as unique as you.

If you have questions about the 60/40 portfolio, or if you would like to discuss your specific financial situation, Comprehensive Advisor is here to assist. Our goal is to create a well-thought-out strategy built on trust and solid information. Don’t let the complexities of 2023 lead to anxiety around your financial future. If you want to know more email us at info@ComprehensiveAdvisor.com or call (760) 813-2125.

About Our Advisors

Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees, in business administration and economics, and is Life Insurance licensed in several states. He is passionate about guiding his clients on retirement income planning, helping each client pursue their specific retirement goals, and defending the assets his clients have worked so hard to achieve. Brett is a California native and currently resides in San Elijo Hills with his beautiful wife and three children. Our team of qualified professionals have experience in the financial service industry, and our advisors hail from some of the largest independent broker/dealers and banking institutions in the country. They have dedicated their professional careers to creating personalized financial solutions for individuals and families who seek successful retirement planning and currently offer investment advisory services through AE Wealth Management, LLC. Our advisors take a common-sense approach to the planning process and work with clients to create a retirement road map to help ensure their assets are protected and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County and beyond. Learn more by connecting with Brett on LinkedIn or email them at info@ComprehensiveAdvisor.com.

Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor.  C.A. Financial & Insurance Services, CA Ins. Lic. #6000262. This material is intended to provide general information and is believed to be reliable, but accuracy and completeness cannot be guaranteed. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income, etc., generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. 1815458- 5/23