Is the 60/40 Portfolio Dead?

The 60% stocks and 40% bond balanced portfolio (60/40) has been a simple recipe for success for many years. But the world has changed significantly. If this recipe is to stay successful, it will need a remix.

Michael Greenberg, CFA, CAIA

Profile name

Wylie Tollette

Profile name

Remixing the recipe for success

The 60% stocks and 40% bond (60/40) balanced portfolio has been a simple recipe for success for many years because of four basic tenets:

  1. Positive longer-term returns for stocks, driven by underlying economic growth
  2. Falling but still positive yields on bonds, particularly sovereign bonds
  3. Low and contained inflation
  4. Negative correlations between stocks and bonds (move in opposite directions), particularly during recessions

60/40 has delivered the goods…Growth of $10,000, Monthly Returns, June 2008 – August 31, 2020

Source: Franklin Templeton Capital Market Insights Group, MSCI, Bloomberg, Macrobond. Important data provider notices and terms available at www.franklintempletondatasources.com

The question is, in the current environment of lower bond yields, potentially waning correlation benefits, some risk of inflation, and more limited central bank effectiveness, will the 60/40 continue to deliver?

Four Strong (Head)Winds

  1. Low bond yields – low and even negative developed market government bonds yields are clearly going to sting as return expectations will be hampered.
  2. Reduced negative correlation impact – with such low yields, the negative correlation between bonds and stocks may diminish.
  3. Waning disinflation –increasing pressures on inflation from aggressive monetary and fiscal stimulus, increased protectionism/nationalism, and supply chain disruption/re-shoring could hurt bond prices via higher yields.
  4. Limited monetary tools - near-zero/negative interest rates and bloated balance sheets mean less ammunition for central banks to fight the next economic downturn. A move to heavier fiscal policy and resulting increased government issuance could pose a headwind to bond prices.

Government bonds galoreUnited States: Treasury Issuance As of August 31, 2020

Source: Franklin Templeton Capital Markets Insights Group, U.S. Department of Treasury, Macrobond. Important data provider notices and terms available at www.franklintempletondatasources.com

Looking forward: Why the 60/40 needs a tune-up, not an overhaul

Although challenged and in need of a tune-up, we still believe the 60/40 remains a solid choice for many investors but some changes are in order:

  • Adjust return expectations – although the contribution to returns from bonds will be much lower, we think there is a likely cap on how far and fast yields could rise thus limiting the downside. More modest return expectations for the 60/40 portfolio using our longer-term forward-looking Capital Market Expectations suggests 4-5% is probably fair (this ignores potential value-add from active manager selection and dynamic asset allocation).

  • Be discerning on where you allocate bond exposure – as yields rise the cost to hold government bonds goes up, but also starts to build in extra downside protection. Some government bonds still have legs given higher yields and steeper curves and will provide better diversification to equities.

Still headed in the right directionWorld Government Yield Curve, as of September 2020

Source: Franklin Templeton Capital Market Insights Group, Macrobond, BUBA, ECB, BoC. Opinions expressed are those of FTMAS and subject to change without notice. Important data provider notices and terms available at www.franklintempletondatasources.com, as of September 30, 2020

Being nimble in asset allocation and security selection will help avoid certain risks and take advantage of opportunities. We could see greater capital appreciation in some bond markets that have higher starting point in yields.

Regional comparison of falling yield scenarios

Source: Barra, as of September 30, 2020 *Assumes immediate price shock

  • Other investment tools could be considered as a complement - asset classes like gold, inflation-protection securities, alternatives, equity style factors, and certain foreign currency pairs all could complement government bonds and are useful building blocks to consider for the traditional 60/40 portfolio.

  • Seek advice of a financial advisor – the goal is to build the overall nest egg of which the return on one’s investments is just one input. Avoiding costly mistakes especially in today’s low return environment is key. Maximizing wealth accumulation can be helped by avoiding the pitfalls of certain behavioural biases, optimizing savings plans, insurance strategies, tax planning, and will and estate planning are all key. Research suggests a professional advisor can lead to substantially better wealth accumulation for investors.

Get a coach

  • Integrate a multi-asset solution - to help navigate the complexities and changing investment landscape consider a professionally managed multi-asset solution. There are various ways to integrate a multi-asset solution into the investment process to tap expertise and improve efficiencies. A multi-asset solution can:
    • be used as a sleeve in a broadly diversified portfolio
    • implemented as a core holding in a core/satellite approach
    • integrated fully as the sole investment vehicle in a full delegation model


The 60/40 solution: Evolve, don’t abandon

The 60/40 portfolio’s pillar of past successes is the return and negative correlation provided by developed market government bonds. We may be moving to a regime where there may be a small cost to hold these bonds, but we expect that the negative correlation will hold even though the amplitude of protection may weaken.

Business as usual will not suffice. Investors will need to adapt to ensure that the 60/40 portfolio continues to help achieve reasonable outcomes. They will need to:

  • Adjust return expectations
  • Be dynamic and discerning on developed market government bond exposure
  • Expand the toolkit to diversify and complement developed market government bond exposures with other investments
  • Get professional advice to maximize final “nest egg” values
  • Incorporate a professionally managed multi-asset solution into the investment process

The 60/40 (or other multi-asset portfolios of varying asset mix depending on client risk tolerance) remains a very viable option for many medium-to- longer-term investors; but to achieve their goals, incorporation of best practices and evolution from the status quo will be essential.


Download the PDF to read the full topic paper.