Two of the most well-known names in investment banking have taken opposing stances in the debate of whether the classic 60% stocks and 40% bonds portfolio structure is outmoded, according to an article in The Wall Street Journal. The 60/40 model performed disastrously in 2022, leading BlackRock to call it outdated, while Goldman argues that losses are inevitable no matter what and the 60/40 is still a viable strategy.
But there are solid points to be made on both sides, the article contends. The 60/40 model became the standard because it’s an easy way for investors to have a reliable mix of exposure to growth, income from bonds, and refuge when stocks and bond yields decline. But last year, both stocks and bonds were down, obliterating that refuge that the 40% of bonds is supposed to provide. If you take Goldman’s side, 2022 was an anomaly, and maintaining a 60/40 portfolio keeps a neutral base for whatever the uncertain future holds. Losses have always happened, and “will happen in the future,” Sharmin Mossavar-Rahmani of Goldman Sachs told The Journal. “But it’s rare.” According to Goldman’s data, U.S. stocks and bonds have simultaneously lost money over a 12-month stretch only 2% of the time since 1926. While any loss is upsetting, investors wouldn’t make any drastic changes to their portfolio unless they know for certain that this is the beginning of a new market cycle.
That point is BlackRock’s exact argument, that this is the beginning of “a different regime. The great moderation is over,” says Vivek Paul of BlackRock Investment Institute. While 10-year Treasury yields have fallen for 4 straight decades, bonds provided long-term gains to bondholders, especially in the last 20 years as a protection against stock losses. But now, the connection between bonds and equities seems to have shifted. That leads many analysts, including at Goldman, to believe that this effect could persist for a long time, especially given the pressure that demographics, deglobalization, and increased spending to reverse climate change have on inflation. If inflation stays relatively high, it’s reasonable for investors to want to hold a lower percentage of ordinary bonds. But for those who are uncertain, the 60/40 offers a good base to start from, the article contends.
In addition, many of the alternatives to bonds also performed terribly last year. TIPS (Treasury inflation-protected securities) lost nearly the same amount as run-of-the-mill Treasurys, and private markets, where the fees are much more expensive, lost value as interest rates spiked. Even commodities, which outperformed earlier in the year, have now dropped almost back to 2021 levels. The underlying issue for every portfolio strategy last year was that the “Everything Bubble” deflated. With so much uncertainty and terrible performances across the board, the 60/40 equity/bond portfolio is still a good starting place, with perhaps a little more inflation protection added in for good measure, the article concludes.