Is the 60/40 Portfolio Still Relevant Today? 60/40 Stocks & Bonds Portfolio Explained
Joel Kohâ—Ź
As with many things in life, striking a balance is essential.
This applies to our diet, work-life and many other areas of our life too.
Unsurprisingly, investors are looking for a balanced investment portfolio, as evidenced by the popularity of the 60/40 portfolio allocation strategy.
But, is this investment strategy worth your time?
Here is all you need to know!
TL;DR: High Return Investments — Is the 60/40 Portfolio Still Relevant Today?
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their due diligence and consider their financial goals before investing in any investment products.
Click to Teleport
- Portfolio Bonds vs Stocks
- What Is the 60/40 Portfolio?
- What Is Considered a High-risk Portfolio?
- What Is the Average Return on a 60/40 Portfolio?
- Is There a 60/40 ETF?
Portfolio Bonds vs Stocks
Before we begin, it is crucial that you know what a stock and a bond are.
What Is a Stock?
A stock is a type of investment available on the stock market that gives you part ownership of a listed company.
For example, if you have 1,000 stocks in Company XYZ and the company’s total number of stocks available in the stock market is 1,000,000, you own 0.1% of Company XYZ.
You may have also come across the term “shares” or “equities”. They all mean the same thing; stocks, shares and equities can be used interchangeably.
What Is a Bond?
In essence, a bond is like a loan issued by a company or government to an investor.
You act like a “lender”, and the company or government acts as a “borrower”. Bonds are another form of investment option, just like stocks.
Bonds are commonly referred to as fixed-income securities. They work by paying back a regular amount, also known as the coupon rate, in return for the risk lenders take on.
Let’s take an example of a $10,000 bond with a 10-year maturity date and a coupon rate of 5%. You will be expected to get $500 each year for 10 years, after which the original $10,000 (face value) will be paid back to you.
Generally, stocks are riskier and more volatile compared to bonds. But, they also tend to have historically higher returns. Keep this in mind.
FYI: According to Fidelity, ‘Volatility is an investment term that describes when a market or security experiences periods of unpredictable, and sometimes sharp, price movements. People often think about volatility only when prices fall; however, volatility can also refer to sudden price rises.’
What Is the 60/40 Portfolio?
Traditionally, when it comes to portfolio allocation, investors would allocate more bonds or stocks depending on the investment risk they were willing to take.
One such allocation is the balanced 60/40 portfolio, where 60% of the portfolio is invested in equities, and the other 40% is invested in bonds.
In theory, this 60/40 portfolio will provide close to equity-like returns without the high volatility of a high-risk 100% equity portfolio.
What Is Considered a High-risk Portfolio?
We previously wrote about high-risk portfolios about how much investment risk you should take as You Grow Older.
As a general guideline, a person’s life stage is an excellent factor in determining their investment risk appetite.
In turn, your risk appetite affects your asset allocation strategy when constructing your investment portfolio.
Age Range Situation/ Life Stage Investor Profile Investment Strategy Asset Allocation Percentage Example
20 - 30 Fresh graduate or those who have worked for a few years Willing to assume a relatively higher level of risk to achieve long-term capital growth High growth
(Aggressive)25% fixed income
75%
equity/stocks
31 - 40 Planning to get married or buy a new home Willing to assume an above average level of risk to achieve higher returns Growth 35% fixed income
65% equity/stocks
41 - 50 Planning to have children Willing to assume a medium level of risk to achieve stable returns Balanced 45% fixed income
55% equity/stocks
51 - 60 Children grown up and working Willing to assume a relatively low level of risk to achieve stable capital appreciation Conservative 70% fixed income
30% equity/stocks
61 and above Approaching retirement Willing to assume the lowest level of risk with primary focus on capital preservation. Defensive 80% fixed income
20% equity/stocks
Source: Allianz Global Investors
Generally, the younger you are, the more you can afford a high-risk portfolio with a higher allocation to equities.
Although these guidelines mentioned are suitable for most people, they do not take into account one crucial factor that can immediately change one’s risk appetite:
The amount of savings you have.
One could be 40 but have almost zero savings due to high expenditures or low income. On the other hand, a 20-year-old genius entrepreneur could already have $1 million in his bank from selling a startup.
That said, the common assumption is that younger Singaporeans will have lower savings than older Singaporeans.
We all know that there will always be outliers.
When it comes to risk appetite, the amount of savings affects the amount of risk you can take.
Having $100,000 worth of savings at the age of 20 compared to someone at age 50 will affect the person’s risk appetite more than their age.
You can read more about it here:
What Is the Average Return on a 60/40 Portfolio?
Talk of balance is good, but you might be thinking, how exactly has the 60/40 portfolio performed?
Well, we can look at this example of a global 60/40 portfolio which is a good proxy of the 60/40 portfolio:
As of 30 September 2022, this Stocks/Bonds 60/40 Portfolio returned -20.69% Year-To-Date (YTD) and had an annualised return of 7.31% in the last 10 years:
| Period | Return (%) as of 30 September 2022 | Return (%) Inflation Adjusted | Standard Deviation (%) | Max Drawdown (%) | Months Positive - Negative |
|---|---|---|---|---|---|
| 1M Sep 2022 | -7.12 | -7.12 | -7.12 Sep 2022 - Sep 2022 | 0 - 1 | |
| 3M | -4.53 | -4.48 | -10.22 Aug 2022 - Sep 2022 | 1 - 2 | |
| 6M | -16.01 | -18.46 | -16.01 Apr 2022 - Sep 2022 | 2 - 4 | |
| YTD | -20.69 | -25.34 | -20.69 Jan 2022 - Sep 2022 | 3 - 6 | |
| 1Y | -16.1 | -22.29 | 14.46 | -20.69 Jan 2022 - Sep 2022 | 5 - 7 42% pos |
| 3Y(*) | 3.59 | -1.23 | 13.52 | -20.69 Jan 2022 - Sep 2022 | 23 - 13 64% pos |
| 5Y(*) | 5.29 | 1.53 | 11.88 | -20.69 Jan 2022 - Sep 2022 | 39 - 21 65% pos |
| 10Y(*) | 7.31 | 4.7 | 9.42 | -20.69 Jan 2022 - Sep 2022 | 84 - 36 70% pos |
| 15Y(*) | 6.31 | 3.85 | 10.23 | -30.55 Nov 2007 - Feb 2009 | 120 - 60 67% pos |
| 20Y(*) | 7.56 | 4.94 | 9.33 | -30.55 Nov 2007 - Feb 2009 | 165 - 75 69% pos |
| 25Y(*) | 6.5 | 3.94 | 9.66 | -30.55 Nov 2007 - Feb 2009 | 196 - 104 65% pos |
| 30Y(*) | 7.86 | 5.23 | 9.33 | -30.55 Nov 2007 - Feb 2009 | 242 - 118 67% pos |
| MAX(*) 1 Jan 1972 | 9.01 | 4.85 | 10.04 | -30.55 Nov 2007 - Feb 2009 | 396 - 213 65% pos |
But as you can see, 2022 was a horrible year for investors holding onto a 60/40 portfolio.
In an article published last month, Morgan Stanley found that (emphasis are mine):
From the 1980s until recently, a portfolio of 60% stocks and 40% bonds experienced a “golden age”—and for good reason. The mix consistently provided investors with attractive risk-adjusted returns, with total returns often equal to or better than those of the S&P 500 Index and with lower volatility.
But, this strategy may no longer pack the same punch. Persistent inflation and growing recession fears have battered markets in 2022, providing strong headwinds to the 60/40 portfolio and prompting some critics to proclaim the “end” of the 60/40 as a useful investment strategy.
While we do expect the 60/40 portfolio to deliver lower risk-adjusted returns compared with those over the last four decades, that doesn’t mean it is broken. Morgan Stanley & Co.’s Chief Cross-Asset Strategist, Andrew Sheets, recently forecast a 10-year return of about 6.2% per year for the strategy, which is 3.9 percentage points above their forecast for inflation. The 60/40 may remain attractive for some investors, even as others may opt for a different strategy.
Buying ETF Singapore: Is There a 60/40 ETF?
To implement this 60/40 portfolio, you could do your due diligence on the iShares Core Growth Allocation (NYSEARCA: AOR) exchange-traded fund (ETF).
Once you have done your research, you can invest in this ETF via any of the brokerages in Singapore offering access to the US market:
Related Articles
Advertisement
