After years of underperformance, the classic 60-40 portfolio is making a comeback, but financial advisors argue it may not be the best option for everyone.
The 60-40 portfolio, which allocates 60% of holdings to stocks and 40% to bonds, has returned more than 11% to investors in 2023, nearly double its average annual return between 2012 and 2022. However, financial advisors caution that the 60-40 portfolio may not be suitable for all investors and offer alternative strategies to consider.
Why the 60-40 is back:
For years, near-zero interest rates made bonds less attractive, leading to the underperformance of the 60-40 portfolio. However, with interest rates rising, bonds are now offering solid real yields, making the classic 60-40 portfolio more appealing. If interest rates fall in the future, bond prices will rise, leading to potential gains for investors.
What are your real investing needs?
Financial advisors argue that the 60-40 portfolio is a generic option and may not be suitable for all investors. Factors such as age, income, debt, and risk tolerance should be considered when creating a portfolio. Retirees may need more stability and income, while young investors may benefit from a higher allocation to equities.
The birth and criticism of the 60-40 portfolio:
The 60-40 portfolio was developed by Nobel prize-winning economist Harry Markowitz and is based on Modern Portfolio Theory. While it focuses on risk-adjusted returns, critics argue that it may not maximize wealth over time.
A 60-40 base—and a few ways to spice things up:
Despite criticism, most wealth managers still find the 60-40 portfolio useful. However, they suggest adding alternative investments to enhance performance. Options such as private credit, municipal bonds, and real estate can offer higher returns and reduce risk. Wealth managers also emphasize the importance of tailoring portfolios to individual needs.
Investors looking to boost returns can consider alternative investments such as private credit. Lending money directly to companies on the private market can offer attractive returns. Municipal bonds, issued by state and local governments, are another option that provides tax advantages and relative safety.
While the 60-40 portfolio is experiencing a resurgence, financial advisors caution that it may not be the best option for everyone. Tailoring portfolios to individual needs and considering alternative investments can enhance performance and reduce risk. The key is to find the right balance between stocks and bonds while considering other asset classes that align with one’s goals and risk tolerance.