You're probably too invested in equities. Why a 60-40 portfolio is still the smart way to go.

By Mark Hulbert

Stock portfolios disproportionately suffer from 'volatility drag'

Investors would be wise not to put too much of their portfolio in equities.

You almost certainly are more heavily invested in the stock market than you need to be.

This is true even for younger investors many years away from retirement. That's because more conservative portfolios, such as the traditional 60% stock/40% bond portfolio, often perform almost as well as an all-stock portfolio over 30-year holding periods.

This is illustrated in the accompanying chart. Notice that for most of U.S. history, an all-stock and a 60-40 portfolio have run neck-and-neck for trailing 30-year returns.

You might wonder how this can be, given that stocks far outperform bonds over the very long term. The reason is that, over 30-year horizons, there almost always is at least one massive bear market, and 30 years often are not long enough for the stock market to fully recover.

This effect is sometimes referred to as volatility drag: It takes a larger percentage gain to overcome a given percentage loss, and this drag grows by the square of volatility. It's a mathematical fact of life that a portfolio that loses 20% and then gains 20% will still be down 4%, while one that loses and gains 30% will still be down 9%.

That's one of the reasons why the lower-volatility 60-40 portfolio is able to hold its own over 30-year periods. By losing less than an all-stock portfolio during bear markets, it doesn't need to gain as much subsequently to remain a competitor over the longer term.

This may be all well and good as a general rule, clients often respond when I present this data to them. But what if bonds are in a bear market, as they appear to be currently? Then surely a 60-40 portfolio won't come out ahead.

Not necessarily. Though no one can know in advance the direction of interest rates over the long term, a tentative answer to these clients' questions comes from searching for correlations between 30-year returns and where interest rates stood at the beginning of those periods. Since 1871, when interest rates were above the median at the beginning of the average 30-year period, the 60-40 portfolio actually did better relative to an all-stock portfolio than when rates were below median.

The 2026-'27 Hulbert Financial Digest honor roll

These are some of the reasons my performance-auditing firm each year updates an investment newsletter honor roll of monitored investment newsletters that have produced above-average performance in both up and down markets. Though the newsletters that make the grade rarely are at the top of the annual performance sweepstakes, they hardly ever are at the bottom either. They instead pursue a slow-and-steady approach that is expected to shine only over the very long term.

Last year's honor roll is a case in point. Each of the two newsletters on it lagged the S&P 500's SPX 15.7% total return over that year, gaining 12.5% and 1.6%, respectively. Yet both have handily beaten the market over the past 20 years.

If you are willing to incur greater risk, more power to you. My auditing firm tracks many additional newsletters that have outperformed those on my firm's honor roll - as you can see from these performance scoreboards. Just be prepared for the very real possibility that you will not earn enough to compensate you for the sleepless nights you may incur over the next 30 years.

Notice that my argument has nothing to do with the stock market's extreme overvaluation, because of which stocks are destined to produce below-average returns over the next decade or two. But that's also a good reason to err on the side of being more conservative.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert

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10-14-26 1825ET