60/40 Portfolio Has Worst Loss Since March 2020

60/40 Portfolio Has Worst Loss Since March 2020

The 60/40 split portfolio between equities and bonds is a classic standard of long-term investing, but last month it had its worst slide since the start of the pandemic in March 2020, reports Bloomberg. As markets factored in a faster schedule of raising interest rates, both bonds and equities plummeted, with the Bloomberg 60/40 index losing 4.2%.

How far and how fast the Fed raises rates and tightens policy will determine the performance of the 60/40 portfolio this year, investors believe. If the Fed becomes aggressive in the face of elevated inflation, that could erode the 60/40 portfolio’s performance and result in a stagflationary situation where both equities and bonds drop.

The 60/40 model has been a popular long-term strategy for 40 years, especially for retirement plans offered by asset managers to U.S. employees who have 401Ks, the article continues. The diversified approach allows for brief negative swings for both equities and bonds because high-quality bonds like Treasuries are less volatile than equities and generally grow in value even when risk assets dip, and equities produce returns over time as companies have consistent earning growth. But the solid performance a 60/40 portfolio has had over the last decade has been because of confluence of factors: low inflation, falling bond yields, an advancing stock market. As a result, 2021 ended with both equity and bond valuations at record highs—a tricky environment for producing future returns.

Investors had already been looking for new ways to move away from the 60/40 approach, Bloomberg reports, with some advising reducing the bond portion and others recommending selling off U.S. large cap shares and buying smaller, cheaper foreign stocks. Still others are underweighting bonds and allocating more to alternatives, such as the private debt markets where assets are not tied as tightly to those of publicly traded stocks and bonds.

In a note to clients last week, Citigroup Inc. strategist Alex Saunders wrote they are adjusting portfolios by “reallocating…to real-estate, CTA, quality equity and carry strategies [that deliver] similar returns with less volatility and a more robust performance across regimes.”