The 60/40 Portfolio Has Another Big Year, Muzzling Critics

To the surprise of critics who have long been calling for the demise of the  this strategy, balanced portfolio’s of stocks and bonds have performed well in 2020

▪A balanced portfolio of stocks and bonds for decades was among the few venerated precepts in investing. Yet doubts about the approach grew after the pandemic hit and turned 2020 into a year like no other.

▪But for all the handwringing, in reality it looks like it will be another year of solid performance for 60/40. A model portfolio composed of 60% U.S. stocks and 40% bonds has climbed 13% year-to-date, according to a Bloomberg index. That’s in line with the rally in the S&P 500 Total Return Index and bigger than the 3.5% gain in the HFRX Global Hedge Fund Index.

▪The strategy’s resilience is a rebuttal to the many critics who have been calling for its demise for some time. Late last year, Morgan Stanley predicted a period of anemic returns for a typical 60/40 portfolio, and this year, a debate began on potential alternatives to bonds in the strategy as yields slumped to historic lows.

▪The argument went that bonds can’t be a hedge against equities if they both rise and fall together. But that’s a misunderstanding of the concept of 60/40 investing, one meant to result in a diversified portfolio for the longer-term investor, not a short-term focused absolute-return hedge fund.

▪Even over the short-term, a blended portfolio has proved resilient. At the height of the coronavirus fears in March, the Bloomberg 60/40 portfolio fell less than the S&P 500 Index — a sign of the benefits of diversification in action.

▪Still, caution abounds about a balanced approach. Deluard, who earlier this year warned of a “nuclear winter” for 60/40 portfolios harking back to the decade-long bust in the 1970s, said the strategy faces tougher times ahead.

▪JPMorgan Asset Management recently cut its expected returns for a 60/40 portfolio to 4.2% for the coming years, though it also lowered growth forecasts for global-equity portfolios to 5.1%.

▪For Societe Generale SA strategist Solomon Tadesse, the deflationary pressures unleashed by the coronavirus pandemic and the unprecedented monetary-policy response it triggered are likely to result in lower correlations between various asset classes going forward. That should benefit 60/40 investing, he said.

▪“The skepticism on 60/40 and more generally cross-asset performance was misguided as it did not account for the huge tailwind behind asset-return correlations,” Tadesse said. “I do expect the strong performance of the strategy to continue.”



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