The 60/40 Strategy Portfolio – Is It Dead? Backtests, Alternatives, And Substitutes Analysis

Determining the right mix of assets to help you reach your short-term and long-term financial goals is the key to building a winning investment portfolio. For many years, financial advisors and experts recommend the 60/40 portfolio because of its simplicity and favorable risk-adjusted returns. But given the changing economic situations in 2022 and the 60/40 portfolio’s 16.1% decline in the first half of the year 2022, one might wonder whether the 60/40 portfolio is out of season or simply dead! Are you wondering what the 60/40 portfolio strategy is?

The 60/40 portfolio strategy is one that allocates 60% of capital to equities and 40% to bonds. It consists of a diversified portfolio of stocks and bonds. In its simplest form, it could be achieved by investing in the S&P 500 ETF and U.S. Treasuries, which give a US-only portfolio.

However, by including international stocks and bonds, one can construct a globally diversified 60/40 portfolio.

In this post, we take a look at the 60/40 portfolio and its performance, and at the end of the article, we look at ways you can improve the 60/40 strategy.

Table of contents:

What is the 60/40 portfolio?

The 60/40 portfolio is one that allocates 60% of capital to equities and 40% to bonds. It consists of a diversified portfolio of stocks and bonds. In its simplest form, it could be achieved by investing in the S&P 500 ETF and U.S. Treasuries. But that would mean having your entire portfolio in US-based investments. By including international stocks and bonds, you can construct a globally diversified 60/40 portfolio.

While the balance of this 60/40 mix can be adjusted based on an investor’s time horizon, risk tolerance, and financial goals, its stock-bond combination remains the same, which is why it is considered a “diversified” portfolio.

60/40 portfolio and correlation

The model works because stocks and bonds tend not to correlate most of the time. Usually, when growth assets, like stocks, sell off due to economic slowdowns, safer assets like bonds appreciate as investors seek stability. Stocks tend to suffer in a recession due to less economic growth, while bonds can rally because the U.S. Federal Reserve typically cuts interest rates to support the economy.

Here is how: when interest rates are cut, bond yields drop but bond prices go up. The rise in bond prices provides helps to cushion overall returns when stocks are falling. To better understand this relationship, please read our previous articles on the topic:

In theory, the 60/40 portfolio provides adequate diversification that allows you