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Published on: 07/21/2023 • 4 min read

The 60/40 Portfolio is Back — Here’s Why

The 60/40 portfolio has been a popular investment strategy for decades, acting as the standard for a balanced portfolio, but its popularity has been waning in recent years as investors have searched for a less risky portfolio split.

Why did this once ubiquitous portfolio seemingly fall out of trend? And why is it making a comeback now?

To put it simply, the 60/40 portfolio is split between two basic, market-driven assets ​​— stocks and bonds — and excludes inflation-hedged assets such as gold and real estate. In other words, this portfolio split offers little to no protection from stock market volatility. Since stocks and bonds have traditionally been more stable investments, the 60/40 portfolio has been a reliable source of income — that is until historic volatility caused by COVID hit. Let’s get into the details.

To hear Avidian President and Partner Michael Smith’s take on the 60/40 portfolio split, head over to our YouTube!

What is a 60/40 portfolio?

A diversified 60/40 portfolio is a mix of stocks and bonds, typically in the ratio of 60% stocks and 40% bonds. This combination seeks to provide investors with a balance between growth potential (via the stock portion) and stability (the bond portion). For some investors, this can be an attractive way to invest because it offers both upside potential and downside protection.

The 60/40 portfolio may offer investors a balance between growth and stability, but this doesn’t mean it’s without inherent market risk. As you probably know, markets tend to either be bullish vs bearish; when the stock market is bullish, stocks tend to rise in value, and when the stock market is bearish, it means that stocks may fall in value.

In a similar fashion, bonds can also be affected by changes in interest rates. If interest rates rise, bond prices could decrease and if interest rates fall, bond prices could increase. Therefore, just because the portfolio holds both stocks and bonds, it doesn’t make it completely immune from market fluctuations.

Where did the 60/40 portfolio go?

The 60/40 portfolio has been popular for decades, however, it has never been immune to the volatility of markets. Over the past several years, investors have favored a more diversified approach. Focusing instead on managing multiple income streams by including inflation-hedged assets such as gold and real estate in their allocation strategy. This shift in investor appetite fed by the fear of high risk is what ultimately caused the 60/40 portfolio to fall out of trend.

For many investors, economic shifts that occurred as a result of the Coronavirus pandemic caused the 60/40 portfolio to be seen as outdated and too risky. If we take a look at the data, we see that last year (2022) bonds had the worst year for fixed income, and stocks had the fourth worst year in history, leaving the 60/40 portfolio strategy in the high-risk/low-reward category. 

These two factors alone made 2022 the worst year for this portfolio split, but if we look at 60/40 portfolio historical returns this trend is fairly isolated to this time period.

Is the 60/40 portfolio still relevant?

The popularity of the diversified 60/40 portfolio has been recently revived due to a combination of factors. On the one hand, stocks have seen a strong rally over the last year, making them attractive for investors who want growth potential. At the same time, if history is any indication, bonds are well on their way to a comeback, making them attractive for investors seeking stability in the long term. 

As a result of these two factors, the 60/40 portfolio has once again become a great benchmark for green investors. However, as wealth accumulates, investors may need to consider adding alternative assets other than bonds and stocks, that may be able to offer a hedge against market volatility for the best risk-reward returns.

Continue reading: Are bonds a good investment today?

Wondering whether the 60/40 split is ideal for you? Let’s talk.

After a brief hiatus, the 60/40 portfolio has regained some of its popularity as the future of market trends seem optimistic. However, this portfolio allocation isn’t for everyone. If you’re considering trying out this portfolio split or any other investment strategy, you’ll want to consult with a wealth management firm that offers investment management as a service.

At Avidian Wealth Solutions, we offer a tailored approach to investing and asset management that can take into account your complete financial landscape. With physical offices in Houston, Austin, Sugar Land, and The Woodlands each offering a boutique family office experience, our experienced team can offer you a personalized service that works towards achieving your financial goals.

To learn more about the Avidian difference, schedule a conversation with us today!

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