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60/40 scorecard

The 60/40 portfolio has been the backbone of the wealth management industry for decades, and for te most part, we can say it has worked. It provides lower returns than equity markets, but it does so with less volatility, which makes the combination really appealing for investors. Lately, however, the strategy has been criticized because both bonds and stocks have been highly correlated, putting the potential diversification benefits at risk. As you can see in three chart below, however, the 7 year rolling returns of the 60/40 have been positive 100% of the time over the last 40 years in nominal terms, and 90% of the time in real terms. It is true that bonds (using Bloomberg Agg) are not being a net positive contributor to the strategy at this point, but as rates go up, reinvestments will be done at higher rates providing that cushion to equities that is needed in times of volatility.

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Source: Charlie Bilello

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