What is the trusted 60 40 investment strategy?
Over their 50 years of marriage, Dave and Kathy Lindenstruth adopted a time-honored Wall Street strategy to safeguard and grow their retirement nest egg: a mix of 60% U.S. stocks and 40% bonds known as the 60-40 portfolio.
The 60/40 portfolio, for those unaware, allocates 60% of your investments in stocks and the remaining 40% in bonds. However, with the average annual return of the 60/40 strategy over the past decade at around 6.4%, investors and financial advisors looked elsewhere.
The “60/40 portfolio” has long been revered as a trusty guidepost for a moderate risk investor—a 60% allocation to equities with the intention of providing capital appreciation and a 40% allocation to fixed income to potentially offer income and risk mitigation.
While many analysts and experts predicted the demise of the 60/40 rule at the close of 2022 — a particularly brutal year for both stocks and bonds — this long-term investment strategy is looking favorable once again in 2024 and beyond.
60% stocks/40% bonds gives you about half the volatility you're going to get from the stock market but tends to give you really good returns over the long term. Over the last 20 years, it's been a great portfolio for investors to stick with.
In the last 30 Years, the Stocks/Bonds 60/40 Portfolio obtained a 8.22% compound annual return, with a 9.62% standard deviation.
According to some money managers, it depends. “A 60/40 allocation is appropriate for many investors at some point in their lives,” Goland said. “An alternative is to adopt a more flexible strategy where your allocation weightings change over time depending on your time horizon, cash flow needs and risk tolerance.”
The traditional 60/40 portfolio, a staple of financial planning for decades, with a 60 per cent allocation to equities and 40 per cent to bonds, has been a simple and reliable strategy for investors seeking a balance between risk and return.
Vanguard's research paper on this subject suggests that, for most investors, rebalancing on an annual basis is adequate. “Whether it's 60/40 or another asset allocation, rebalancing will help make sure your portfolio is consistent with your risk tolerance,” Schlanger said.
Cramer's Modified Rule of 40 Test
To calculate whether a company passes the rule of 40 — simply add its revenue growth rate to its Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) Margin. If the sum of those two exceeds 40, then the company is doing OK.
Is Vanguard 60 40 dead?
The long-popular 60% stocks-40% bonds portfolio remains alive and well and has proved to be successful despite a rough 2022, according to a key Vanguard Group researcher. When both stocks and bonds tanked in 2022, many analysts pronounced the traditional balanced portfolio dead.
2022 was the worst performing year for the 60-40 investing strategy since 1937.
With a 60/40 portfolio, investors put 60% of their money in stocks and 40% in bonds. This diversification of both growth and income has generally provided a safe, mundane way for investors to grow their money without taking on too much risk.
The case for a 60/40 portfolio remains strong, with long-term investors in portfolios of 60% equity and 40% fixed income seeing a dramatic rise in the probability of achieving a nominal return of 7%, according to the Vanguard Group's 2024 outlook, “A Return to Sound Money.”
While the 60/40 split is a starting point, experts agree that the standard allocation should be tailored to an investor's risk tolerance, time horizon and goals. A younger investor with a higher risk tolerance may take a more aggressive 80/20 approach, for example, while a recent retiree may favor a 40/60 approach.
Why? The returns of a 60/40 portfolio are based on market direction. Equity returns are driven by growth in earnings, the valuation multiple of those earnings, and to a lesser degree the payment of dividends. These are heavily dependent on the direction of economic conditions and overall direction of equity markets.
Rice listed several reasons why the traditional 60/40 mix that had worked in past few decades seemed to under-perform: due to high equity valuations; monetary policies that have never previously been used; increased risks in bond funds; and low prices in the commodities markets.
Buffett was rightly critical of bonds when the 10-year Treasury yielded less than 1% in 2020, saying that investors effectively were paying more than 100 times earnings for an asset with no hope of higher income.
The 60/40 portfolio has long been used as a retirement investing strategy due to its ability to produce both growth and long-term income. Benefits of this strategy include: Consistent Historical Returns: From 1926 to 2021, the 60/40 portfolio produced an annualized rate of return of 8.7%.
For generations, financial advisers touted the 60-40 strategy as the single best way for ordinary people to invest. The idea is simple: owning stocks in good times helps grow your wealth. When stocks have a bad year, bonds typically perform better, cushioning the blow.
What is the 60 40 rule?
The 60/40 portfolio invests 60% in stocks and 40% in bonds. This approach provides investors with the growth potential of stocks with the added stability and income of bonds. Therefore, investors can achieve reasonable returns while keeping risk under control.
It isn't dead. It's more important than ever. I'm talking about the 60/40 portfolio, which has sometimes been considered the living heart of investing. Those specific numbers — which refer to 60 percent stock and 40 percent bonds as core investment holdings — aren't significant.
Inflation is the biggest risk to a 60/40 portfolio because it can trigger central bank tightening which pushes up real rates, which weighs both on equities and bonds. That risk is now going the other way, where rates can come down and equities can be buffered by bonds.
| Strategy | Compound annual growth rate | Difference with max |
|---|---|---|
| Every 3 years | 7.62% | 0.00% |
| Every 2 years | 7.53% | -0.09% |
| 15% tolerance per asset | 7.43% | -0.19% |
| Yearly | 7.38% | -0.24% |
Save 20% of your income and spend the remaining 80% on everything else. 60/40. Allocate 60% of your income for fixed expenses like your rent or mortgage and 40% for variable expenses like groceries, entertainment and travel.
