Mar 31, 2022 - Economy

Rough quarter for the 60/40 portfolio

Data: Factset/author's calculations; Chart: Axios Visuals

There is a simple piece of advice that any capable financial adviser can offer to an investor who wants a portfolio combining reasonable safety with a reasonable chance of gains: 60% stocks, 40% bonds.

Why it matters: The confluence of high inflation, Federal Reserve tightening, and geopolitical instability is making a normally safe portfolio riskier than it has been, defeating a traditional investment approach that's offered safety in the storm.

  • A 60/40 portfolio has offered a great risk-reward combination in recent decades. But in the quarter that ends today, it will offer one of its steepest losses in years.

By the numbers: As of Wednesday's close, with one day remaining in the first quarter, a 60/40 portfolio (60% in the SPY exchange-traded fund that invests in the S&P 500, 40% in the TLT ETF containing long-term Treasuries) would have returned -6.2% for the quarter.

  • Pending Thursday's market activity, the first quarter is on track for a loss similar to the fourth quarter of 2018 (-6.28%). You have to go all the way back to Q1 2009 (-11.1%) to find a bigger loss.

In the past when stocks and other risky assets fell, there was the prospect of easier money from the Fed and a rush of money toward safer bonds.

  • Now, with through-the-roof inflation, stock market turbulence has coincided with Fed tightening and rising long-term rates, eliminating the usual buffer effect in which stock market declines are buffeted by bond market gains.
  • In fact, it was bonds that dragged performance of a 60/40 portfolio down this quarter, as surging interest rates plunged the return on longer-term bonds into double-digit negative territory.

Yes, but: A person with a 60/40 portfolio who kept the bond portion of their investments in a vehicle with shorter-duration holdings than TLT (which invests in Treasuries with more than 20 years to maturity) would have experienced smaller losses.

The bottom line: Just maybe, the easy gains of a widely-embraced portfolio strategy will not be so easy in the years to come.

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