Why the 60/40 Portfolio Is Still in Play

Despite inflation uncertainty, recent data may restore your faith in the 60/40 investment rule

If you're wondering if the traditional 60/40 portfolio allocation is dead, you're not alone. While today's uncertain environment is prompting investors to rethink their approach, a look at the data shows that this balanced portfolio allocation is alive and well.

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A hypothetical 60/40 portfolio historical performance

  • The hypothetical 60/40 portfolio has done well over the last two decades, providing similar returns to an equities-only portfolio, with less risk.
  • A 60-40 allocation may reduce the impact of a downturn, helping clients to avoid selling during equity market crashes so they can stay the course and achieve their wealth goals.

60/40 balanced portfolio example may outperform with much lower risk vs. 100% equities portfolio.

Historical performance of a hypothetical 60/40 stocks/bonds portfolio vs. a hypothetical 100% equities. Data 7/1/01–6/30/21.

Name Returns Standard Deviation Sharp Ratio
60% U.S. Equities/40% IGB 7.42 8.82 0.72
60% Developed Market Equity/40% IGB 6.69 9.38 0.61
U.S. Equities 8.61 14.80 0.55
Global Equities 7.86 15.63 0.49
Global Equities ex U.S. 6.46 17.06 0.38
Investment Grade Bond 4.56 3.44 0.96

Impact of inflation on a 60/40 asset allocation

  • Concerned about rising inflation, some investors are questioning the ability of the 60/40 stock/bond portfolio to perform as an investment strategy in a high inflationary environment.
  • In times of high inflation, stocks and bonds are more highly correlated. If stock performance falters, bonds are less likely to hedge.

Bond correlation versus inflation

Beneficial effect of investment-grade bond may erode if inflation gets to be high.

Bond correlation versus inflationBeneficial effect of investment-grade bond may erode if inflation gets to be high.Higher InflationPositive CorrelationsLower InflationNegative CorrelationsSTOCKS AND TREASURY BOND CORRELATIONS VS. INFLATIONCore CPI2%Year-Over-YearStock-bond correlations0 Level3-Year Correlations15%10%5%0%0.80.60.40.20-0.2-0.4-0.6-0.81958195919611962196419651967196819701971197319741976197719791980198219831985198619881989199119921994199519971998200020012003200420062007200920102012201320152016201820192021

Reasons to still believe in a 60/40 allocation

  • While it depends on the inflationary environment, which is difficult to forecast, Fidelity believes a 60/40 balanced portfolio allocation helps to ensure optimal long-term performance, keeping investors in the game instead of buying and selling based on market ups and downs.
  • Evidence from our Portfolio Construction Solutions Team's portfolio and Fidelity Portfolio Quick Check results indicates investors are largely sticking with the 60/40 investment rule. Offering a smoother ride and a way to help increase performance without taking on undue risk, this approach can help you better meet your client goals.

60/40 helps achieve wealth goals

Risk comes from both sides; too much equity exposure may increase the risk of loss, whereas not enough exposure may cause "shortfall risk"

60/40 helps achieve wealth goalsRisk comes from both sides; too much equity exposure may increase the risk of loss, whereas not enough exposure may cause "shortfall risk"Investor PortfolioWealth Reference Target60% stocks/40% bonds$700,000$600,000$500,000$400,000$300,000$200,000$100,0001996199719981999200020012002200320042005200620072008200920102011201220132014201520162017201820192020

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