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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.
Explore using the 60/40 investment rule in client portfolios
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 |
Source: For illustrative purposes only. Example of Portfolios is not intended to represent any Fidelity product. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indexes are unmanaged. Hypothetical 60/40 portfolio rebalances quarterly and reinvests dividends.
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.
Past performance is no guarantee of future results. Correlations represented asset class total returns from indexes represented by Fidelity Investments, Dow Jones Total Stock Index, and Bloomberg Barclays. Fidelity Investments proprietary analysis of historical asset class performance is not indicative of future performance. Source: Bureau of Labor Statistics, Global Financial Data (GFD), Bloomberg Barclays, Haver Analytics, Bloomberg Finance L.P., Fidelity Investments (AART), as of 2/28/21.
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"
Stocks: S&P 500 Index return. Bonds: Barclay's U.S. Aggregate Bond Index return. All return data above based on a starting wealth level of $100,000 with no subsequent contributions or redemptions. Investor Portfolio: Stock allocation was reduced from 90% of total assets to 20% of total assets on Dec. 31, 2008, and then stock allocation was increased from 20% to 90% of total assets on June 30, 2013. This adjustment in stock allocation reflects a consistent pattern of 401(k) plan participant behavior for a sizable number of participants in defined contribution plans administered by Fidelity Investments. Wealth Reference-Target: A proxy 7% rate of return that reflects the average historical returns for a portfolio of stocks and investment-grade bonds. Returns in charts reflect hypothetical portfolio outcomes from 1996 to 2016 using actual market returns. Source: Standard & Poor's, Barclay's Capital, Fidelity Investments, as of 3/31/20.
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- U.S. Equities are represented by the S&P 500 Index. Investment Grade Bonds are represented by the BBgBarc U.S. Aggregate Bond Index. Developed Market ex U.S. Equities are represented by MSCI World excludes U.S. Developed Market Equities are represented by MSCI World which includes U.S. Global Equities ex U.S. are represented by the MSCI ACWI excludes US.