An age-old investing strategy is losing its shine, but investors aren't ready to cast it aside.
The 60-40 strategy, in which 60% of a portfolio is invested in stocks and the other 40% in bonds, is a popular investing blueprint touted as a reliable method of diversification, particularly for those saving for retirement. The reasoning behind that mix is that a rise in bonds will help cushion the blow when stocks fall, and vice versa.
Common wisdom suggests that when investors are fearful, stock prices tend to fall, and bond prices rise as people seek safer investments. But when investors are feeling greedy, riskier stocks tend to bring higher rewards, making even high-yielding bonds look less attractive by comparison.
But stocks and bonds both tanked last year, as the Federal Reserve aggressively hiked interest rates to tame wayward inflation that touched a four-decade high. Bonds sold off as yields rose and eroded the value of bonds issued at lower rates, and stocks slid as investors feared that a rapid hike in rates from near-zero levels could plunge the economy into a recession.
Now, Wall Street is grappling with the prospect of higher-for-longer rates as the economy and labor market show little sign of cooling. That's led yields soaring to their highest levels in over a decade. When yields rise, bond prices fall, and Treasuries have been sinking in recent months. Stocks have also given up a chunk of their 2023 gains. Those are characteristics of the perfect storm that sent the 60-40 portfolio nosediving in 2022.
The 60-40 portfolio shed roughly 17% last year, its worst performance since 2008, according to data from Vanguard. This year, the portfolio is hanging onto a roughly 6% return.
Some investors say it's unlikely that last year's carnage will repeat itself.
"Even though we have seen negative returns on bonds again this year, we probably have seen the worst of the damage," said Amy Arnott, a portfolio strategist at Morningstar.
The 10-year Treasury yield topped 5% last week, its highest level since 2007, after Fed Chair Jerome Powell indicated in a speech that monetary policy is not yet restrictive enough to tamp down inflation to the central bank's target. Since then, the benchmark yield has dipped below the key 5% level but remains elevated.
Brian Henderson, chief investment officer at BOK Financial, recommends that investors using the 60-40 strategy not abandon it, but consider adding to their cash allocation in the short-term to take advantage of attractively high interest rates.
"I'm more optimistic because of the rise in yields on the bond side that a 60-40 will do better," said Henderson.
Comments
Post a Comment