A Short-Term Blow

While losses in a 60/40 portfolio are not unusual, losses in stocks and bonds simultaneously are unusual (60% stocks, 40% bonds). Since 1928, with a track record of nearly 100 years, the 60/40 portfolio has never had a negative return in any 10-year period. Diversification benefits of a 60/40 portfolio are not dead, even if they are not working right now.

The synchronized selloff in stocks and bonds has dealt a blow to one of the most popular strategies for long-term investors. The popularity behind the 60/40 portfolio stems from the key principle of diversification—to seek growth potential from stocks while adding protection from conservative bonds for a more stable outcome over the long term. Through September 30, 2022, this portfolio, using 60% in S&P 500 index and 40% in Bloomberg US Aggregate Bond Index, is down roughly 20%. Is this normal?

A look at the worst calendar years for the 60/40 portfolio shows that if the year were to end September 30, 2022, the returns would mark the third worst in history, only after the worst of the Great Depression and the 1937 Crash. For the worst five years outside of the four time periods during the Great Depression, there have been no instances where a 60/40 portfolio suffered losses over a five-year period. The news gets better as you look at the 10-year returns for the 60/40 portfolio. In the nearly 100 years of data, which includes the Great Depression, World War II, the Great Inflation of the 1970s, and the Great Financial Crisis of 2008, there has never been a time period with negative returns for the 60/40 portfolio over a 10-year period.

In 2022, inflation has been the most important concern. The Fed’s effort to tame inflation drove interest rates sharply higher. This caused both stocks and bonds to fall sharply. Given the Fed’s action, negative returns for stocks are not surprising. Much of the pain in bonds stems from starting at near zero yields in 2021, which provided bond investors with no cushion from price hits as interest rates rose. Looking to the future, however, when the fear shifts from inflation to recession to growth, the traditional diversification benefits across stocks and bonds will come back into play. Secondly, the selloff in markets provides greater return potential over the long term. Historically, after an equity bear market (a drop of 20% or more), the subsequent 1-, 5-, and 10-year cumulative returns for the equity
markets have been strong. Similarly, bond yields have improved dramatically too.

The challenges facing a 60/40 portfolio may continue to plague us for longer, but that does not mean the strategy is dead. The sharp selloff in stocks and rising yields in bonds have improved the potential for the long-term outlook for traditional 60/40 portfolios. Finally, investors could seek opportunities to improve diversification through the inclusion of active management, as well as the inclusion of alternative strategies beyond traditional stocks and bonds.

Source: AssetMark Investment Services, Inc. MD Wealth Partners, Inc., is a registered investment advisor in Westlake Village, California that provides a range of investment and estate planning services. The article is a brief overview and is intended to provide information only. The accuracy of the article content is not guaranteed. Always seek the advice of a competent professional when making important financial and legal decisions. The information contained in this article is not a solicitation to purchase or sell investments. Investing involves risks, and there is always the potential of losing money when you invest. Specific investments may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an individual investor’s circumstances and objectives.

MD Wealth Partners, Inc.: A personal wealth enhancement boutique for select clients. mark@mdwealthpartners.com. mdwealthpartners.com. 805.402.8642. Copyright © Mark Wendell 2022. All rights reserved.

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