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 big surprise is how well the 60/40 portfolio has done in a year like 2020 — it has been right on the historical average," said Vincent Deluard, global macro strategist at StoneX Group Inc. "And 2020 has been nothing like an average year."
Adding a hefty chunk of bonds to a basket of stocks has been a staple of diversified investing for decades, with the more stable fixed-income component acting as a balance to riskier growth-sensitive equities.
This year has seen periods when stocks and bonds have moved together, which critics have seized upon to disparage the strategy.
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.
