Investing: Revenge of the 60-40 portfolio

Bonds have gotten “a bad rap,” said Oyin Adedoyin and Miriam Gottfried in The Wall Street Journal. When the Federal Reserve quickly cranked up interest rates to counter inflation in 2022, both the stock market and the bond market “fell in tandem, burning investors conditioned to think of bonds as their portfolio’s primary line of defense.” Both markets rose over the following three years, fueling concern that bonds are no longer the hedge against risky equities that they used to be. Fear not. This year, “bonds are doing what they are supposed to be doing”— moving inversely to equities. The S&P 500 is on pace to post double-digit returns for the fourth year in a row, and a bond selloff has dropped prices dramatically. It has “dragged on returns for people who already own them,” but pushed up fixed-income yields to enticing levels for those on the sidelines. It has also helped revive “the classic 60-40 portfolio,” where a diversified mix of 60% stocks and 40% bonds “cushions volatility.”

“How quaint,” said Michael Santoli in CNBC.com. Suddenly, it doesn’t look so bad to be “prudent” as money flows into bond funds again. The present S&P 500 dividend yield of under 1.4% represents “a modern low,” at a time when “high-grade corporate debt yields 6% with low default risk.” This presents “the best opportunity for buying bonds in decades.” The stage is now set “for another quarterly rebalancing shift in favor” of fixed income. “We don’t know” how “the macro and policy paths will inform market prices.” Consider diversification “an offering of humility before the market gods.”

“It’s good to be a saver again,” said Allison Schrager in Bloomberg, but “saving isn’t quite as safe as it used to be.” I agree that, “with higher yields, the 60-40 is back”—or deserves reconsideration as an investment paradigm. Just know, however, there’s still “no free lunch in finance.” If inflation continues to rise, it “means more uncertainty about real bond returns.” All the increased government debt could also send panic through the bond markets at any given moment. So “safety pays now, but only because it has become less safe.”

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Both stocks and bonds are “less effective diversifiers than many investors realize,” said Mamadou-Abou Sarr in Kiplinger. If you own an S&P 500 index fund, you probably think you’re diversified in equities. Not so. In reality, “a small group of stocks has an outsize influence on your returns.” On the flip side, investors should “no longer assume” the 40% bond allocation provides the same level of resilience it once did. It may be time to “consider investing in real assets,” like commodities, infrastructure, and real estate investment funds. Successful investing “isn’t just about choosing the right eggs—it’s about choosing the right baskets.”