How The 60/40 Portfolio Stacks Up With The S&P 500

A portfolio consisting of 60% stocks and 40% bonds had a golden age from the 1980s — until recently.
The combination offers investors risk-adjusted returns that are frequently on par with, or greater to, those of the benchmark S&P 500 Index.

The 60/40 portfolio faced significant challenges this year due to ongoing inflation and looming recession fears. As a result, some speculators announced the death of the 60/40 investing strategy.

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A 60/40 portfolio invested in line with benchmark U.S. stock and bond indexes lost 34% between Jan. 1 and Oct. 21, according to data from Bank of America. Meanwhile, the S&P 500 lost 19.58%.

Only two calendar years have been worse for bonds. Both years occurred during the Great Depression.

"Since 1976 there have been nine years when the 60/40 portfolio posted negative returns," research director Scott Opsal of The Leuthold Group wrote.

"Three of those years barely registered negative, and three others stopped short of a 5% overall loss. The only two annual declines of more than 5% came in the depths of severe equity bear markets in 2002 and 2008, and in both cases, bonds delivered positive returns to temper the overall loss."

The 60/40 portfolio is intended for moderate risk and moderate rewards. During the past 30 years, it has produced a 7.9% annualized return.

This relies on the fact that, while the stock market and bond market both decline, they rarely do so simultaneously. Investment experts refer to this as having a low (or negative) correlation.

The Federal Reserve has started the biggest six-month increase in interest rates in 41 years in reaction to runaway inflation. The S&P 500 dropped nearly 20% over the course of the year due to market concern that the Fed's measures could push the economy into a recession.

The broad bond market has decreased by more than 15% since the start of the year. Bond prices and interest rates are moving in opposite directions.

A $10,000 investment in the broad bond market in early 2022, with dividends reinvested, would currently be worth $8,450. That's a loss of $1,550, or 15.5%.

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