60/40 stock-bond strategy eyed for next decade
The classic 60/40 portfolio, allocating 60% to stocks and 40% to bonds, faces criticism after recent poor performance but experts argue it remains a solid choice for long-term investors. Despite a tough 2022, where both assets declined sharply, projections suggest bonds and stocks could deliver steady returns over the next 10 years. This approach offers diversification amid economic uncertainties.
The 60/40 portfolio—60% in stocks and 40% in bonds—has become one of the most criticized investment strategies in recent years. Investors soured on it following 2022's double whammy, when the S&P 500 dropped 19.4% and the Bloomberg U.S. Aggregate Bond Index fell 13%. This marked the first time in decades that both stocks and bonds posted significant losses simultaneously, driven by rising interest rates that hammered bond prices while inflation pressured equities.
Despite this setback, the strategy's long-term track record remains robust. Over the past 10 years through 2022, a 60/40 portfolio delivered an annualized return of about 7.5%, according to historical data. Proponents emphasize its role in diversification, helping to balance risk across asset classes that often move in opposite directions.
Looking ahead, Michael Kitces, head of planning at Buckingham Strategic Wealth, argues that bonds are set for a rebound. "Bonds are poised for a strong decade," Kitces stated, forecasting annual returns of 4% to 5% for bonds over the next 10 years as interest rates stabilize post-peak. He pairs this with expectations of 6% to 7% annual returns for stocks, suggesting the 60/40 mix could compound effectively for patient investors.
Kitces acknowledges the current disdain but urges against knee-jerk reactions. The strategy has historically navigated various market storms, from the dot-com bust to the 2008 financial crisis, by providing income from bonds and growth from stocks. With inflation cooling and central banks potentially easing policy, the environment may favor this balanced approach once more.
Critics, however, point to the portfolio's vulnerability in high-inflation, rising-rate scenarios, which exposed its limitations. Still, for those with a 10-year horizon, abandoning the 60/40 in favor of trendier alternatives like all-equity or crypto-heavy portfolios carries higher volatility risks. The key takeaway: Recent underperformance does not erase decades of evidence supporting diversification.