Source: The Leuthold Group

A 60/40 portfolio is a diversification strategy (originating before Sputnik) containing 60% stocks and 40% bonds.

Since the financial crisis, a traditional 60/40 portfolio of U.S. stocks and bonds has delivered an impressive 11.5% average annual return. However, in recent years like 2022, has been a perfect storm for the strategy. With an average 60/40 portfolio dropping 16.1% in the first half of 2022. This has understandably raised concerns—and with high inflation in 2023 and a decline in inflation in 2024 will lead to a lower correlation between stocks and bonds, increasing the benefits of diversification and lowering downside risk in portfolios.

In the 42 years from 1980-2022, the 60/40 portfolio was only flat in only 2 of those years. So historically, it has done well because of diversification. In the rare cases, the 60/40 fell more than 10% within a given year. The encouraging news is that those who stayed the course were often rewarded. In five of those instances, the portfolio ended the year with positive returns. Even more striking, in eight of the nine cases, the following year’s returns were positive, with an average rebound of over 17%.

There may still be challenges in the near term, if national spending increases in the upcoming year the Federal Reserve could raise rates once again to combat inflation. However, it’s likely that much of the rate-hiking cycle will be behind us by year-end. While rising rates have put pressure on bonds, a shift in focus toward slowing economic growth could lead to lower yields. Stocks might face additional hurdles as earnings expectations adjust, but much of the repricing has already happened. Instead of focusing on past returns, investors should remain optimistic and consider the potential gains that lie ahead in the coming months and years.

In conclusion, we believe the 60/40 portfolio still offers a great starting point that can then be optimized to investor risk-tolerance and still can prove useful as a good diversification strategy. However, implementing more diversification such as separate asset classes and a blend of alternatives along with the traditional stocks and bond can potentially extend the risk-management benefits associated with traditional diversification like the 60/40.