DON’T write off the long-term power of a simple 60/40 portfolio.
The reputation of the classic investing strategy, which refers to a split between stocks and bonds, took a beating in 2022, when equities fell and bonds also performed poorly. But it bounced back last year, with Morningstar’s 60/40 portfolio gaining about 18 per cent, according to a report from the company.
The report analysed correlations between the performance of asset classes, and looked at what benefits to risk-adjusted returns came from holding a portfolio with a broader mix of assets than the simple 60/40 split. It found that diversifying into areas including emerging markets stocks, high-yield bonds and global bonds generally hurt returns last year, when the S&P 500 gained 24 per cent.
“After 2022, we saw a lot of people talking about the death of the 60/40 and that you needed to have all these esoteric asset classes,” said Morningstar portfolio strategist Amy Arnott, one of the report’s authors. “The rebound in 2023 is a testament to the fact that you can get good results even with a very simple approach to asset class diversification.”
Morningstar’s analysis looked at rolling 10-year periods going back to 1976 to compare the risk-adjusted returns of stocks (as measured by the all-equity Morningstar US Market index), a 60/40 portfolio split between US stocks and investment-grade US bonds, and a diversified portfolio made up of 11 different asset classes.
While the fully diversified portfolio beat the other two categories occasionally, the 60/40 portfolio had superior risk-adjusted returns, compared with the all-stock portfolio, in about 87 per cent of rolling 10-year periods since 1976. Stocks and bonds have been moving more in sync since the Federal Reserve began raising interest rates in 2022, but “bonds still have a lower correlation versus US stocks than most other major asset classes”, the report found. BLOOMBERG
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