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Is the 60/40 Portfolio Dead?

Is the 60/40 Portfolio Dead?

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar.

After a tremendous runup during the past decade, some advisors and institutions are saying that the 60/40 portfolio is dead. But is it? Here with me today to explore the topic is Christine Benz. Christine is Morningstar's director of personal finance.

Christine, great to see you. Thanks for being here.

Christine Benz: Susan, it's great to see you. Thank you.

Dziubinski: Now let's step back a minute and start with the concept of a 60/40 portfolio. What does that refer to?

Benz: Well, there are different variations, but the classical interpretation of a 60/40 portfolio is 60% S&P 500 index, so large-cap stocks, as well as 40% in Treasury bonds. In some interpretations that's long Treasury bonds. So, historically that has been held out there as kind of a baseline or a starting point for investors' portfolios. There are different variations, but that's sort of the classic version.

Dziubinski: Given that, that blend has done pretty well the past 10 years or so, right?

Benz: It absolutely has. When you look at Vanguard Balanced Index, which I think of as a good interpretation of a 60/40 portfolio, what you have there is about a 10% annualized return over the past decade. That is much better than most other balanced-type products have done. It's been pretty hard to beat.

The interesting thing is, Susan, a decade ago, coming out of the financial crisis, one thing we kept hearing again and again was 60/40 is dead. Lo and behold, 10 years later, it has performed pretty well and has beaten other arguably more complicated and maybe more costly investment mixes.

Dziubinski: You said 10 years ago people were saying this is dead, now they're saying it again. What's triggering that this time?

Benz: Well, this time I think the main focus is on the bond piece, and that is legitimate, especially when you think about starting yields as being a good predictor of what you might expect from bonds over the next decade.

Right now, we're sitting at a point where 10-year Treasury bond yields are around 60 basis points, so 0.60%. The Bloomberg Barclays Aggregate Index is yielding a little bit more than that because it includes exposure to corporate bonds and asset-backed bonds and so forth. But still, it's not over 2% today. That's the big reason that some investors are concerned about 60/40's performance going forward.

The other thing to think about is that 60/40 usually calls for that 60% being in U.S. equities, and we've had just a terrific run in the U.S. stock market. U.S. stocks have outperformed most other foreign markets. So, valuations are stretched here, given that we have had better performance.

When I do these annual compendia of asset-class return forecasts, to a firm, Morningstar Investment Management included, firms are calling for better returns over the next decade from non-U.S. markets than U.S.

Dziubinski: Given that backdrop, should we be tossing 60/40 overboard?

Benz: Well, I sometimes think that the "60/40 is dead" argument is a straw man that investment firms sometimes throw out there because they are peddling other strategies, oftentimes more complicated, oftentimes more costly strategies. So I do think that investors should be on their guard when they hear 60/40 is dead.

I think that they should also use their own time horizons to inform their own asset allocation. No single asset allocation fits all people. Younger investors, folks in their 20s, 30s, even 40s, I would argue, should probably have higher equity weightings, by and large, than 60% because of that drag that is likely to come from having too much in conservative investments.

On the other hand, if you're a retiree getting close to needing your money, I think you want to make sure that you have ample liquid reserves, ample bond holdings in your portfolio. Because we could have further equity market volatility, and the last thing you want to be doing is drawing upon a portfolio that's simultaneously declining. So, really use your own situation to inform how to position your portfolio.

Dziubinski: So, 60/40 may not be dead, but it really may not be applicable for most of us as investors as the correct mix anyway, right?

Benz: That's right. So, the 60% being U.S. equity, I would say, all investors, but especially investors with nice long time horizons, should embrace a globally diversified portfolio. How global you are, I think, really depends on you as an individual. But I think that should be the starting point today for investors' equity allocations. Assume that you will have a globally diversified portfolio.

It's the fixed-income sleeve that I get a little bit more concerned with people dabbling in higher-yielding, potentially higher-risk asset classes. You can venture beyond Treasuries, for sure, and you probably should, given how low yields they have today, but Treasuries have been tremendously effective ballast for equity portfolios. I think to the extent that you have bonds in your portfolio, and again, particularly if you're someone who is getting close to or in drawdown mode, make sure the complexion of that fixed-income portfolio is high-quality so that it really can give you that ballast if we experience another period of market turbulence like we had this past spring.

Dziubinski: Christine, that makes a lot of sense. Thank you so much for your time today.

Benz: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.

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