The 60/40 Portfolio Is Having Its Worst Year Ever. What to Buy Instead.

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The heyday of the 60/40 portfolio, an allocation of 60% stocks and 40% bonds, is over. According to Bank of America Securities, the popular investment strategy is having its worst year ever.

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“Sustained weakness across bond and equity markets further supports the ‘end of 60/40′ thesis,” BofA analysts said in a report. “Adjusting for inflation, a 60/40 portfolio is on pace to lose 49% this year, which would be the worst annual return on record. The correlation between stocks and bonds turned positive in March and is now the highest in a quarter-century.”

Usually, when stocks fall, investors buy US Treasury bonds and other safe assets. The tendency of bonds to rise when stocks fall, or the negative correlation between bonds and stocks, is what underpins a traditional allocation of 60% to stocks and 40% to bonds.

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Investors can no longer count on bonds to buffer losses in their stock portfolios, however, because stocks and bonds are tumbling in tandem this year. The S&P 500 is down about 17% in 2022 while the iShares Core US Aggregate Bond ETF (AGG)—which tracks the investment results of an index composed of the total US investment-grade bond market—is off about 10%.

High inflation is having a corrosive effect on stocks and bonds at the same time. The consumer price index rose 8.3% year over year in April, the Labor Department reported Wednesday, higher than expectations for 8.1%, but lower than the 8.5% increase seen in March. Soaring services prices, such as airfares up 18.6% month over month, helped drive inflation higher.

BofA said “inflationary policies may accelerate the bear market in bonds and keep equities under pressure.”

Investors’ concerns about the Federal Reserve’s ability to temper inflation have led to some wild swings in the stock market, and there appears to be no end in sight.

BofA cautioned investors to expect more volatility as globalization, quantitative easing—the Fed’s purchase of trillions of dollars of bonds during Covid—era deflation—and peace “give way to localism, quantitative tightening, inflation, and conflict.”

Investors should hold more cash and diversify away from “safe” Treasuries, conventional fixed-income portfolios, and long-duration growth stocks, according to the report. “For investors with higher risk tolerances who want to gradually build exposure today, we suggest a combination of shorter duration credit, natural resource equities, and companies that prioritize shareholder returns.”

Write to Lauren Foster at [email protected]


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