- The traditional 60-40 portfolio invests 60% in the S&P 500 and the rest in benchmark Treasurys.
- The 60-40 split, a rule of thumb for retirement allocation, offers more exposure to higher-yielding stocks while having a buffer with low-risk fixed income investments when things go south.
- The Vanguard Balanced Index Fund, which mirrors the 60-40 rule, turned positive on the year in the previous session and rose another 0.8% Thursday.
The Wall Street Bull (The Charging Bull) is seen during Covid-19 pandemic in Lower Manhattan, New York City, United States on May 26, 2020.Tayfun Coskun | Anadolu Agency | Getty Images
While some of Wall Street's most sophisticated traders are still licking their wounds from the unprecedented economic and market disruption caused by the coronavirus, an average investor sitting in the most basic 60-40 portfolio of stocks and bonds just broke even.
The traditional 60-40 portfolio, which invests 60% in the S&P 500 and the rest in benchmark Treasurys, wiped out its 2020 loss after equities' massive comeback from the historic coronavirus sell-off. The Vanguard Balanced Index Fund, which mirrors the 60-40 rule, turned positive for the year in the previous session and rose another 0.8% Thursday.
The 60-40 split is typically a rule of thumb for retirement allocation for its low volatility and steady income. It offers more exposure to higher-yielding stocks while having a buffer with low-risk fixed income investments when things go south. This strategy has worked better this year than simply owning the S&P 500, which is still down 3.6%.
Many on Wall Street were caught off guard by the sheer magnitude and speed of the coronavirus sell-off (and subsequent comeback). The S&P 500 tumbled more than 30% from its record high in the span of a few weeks, suffering the fastest bear market on record. Now as the economy has started to emerge amid the pandemic, stocks are roaring back sharply as investors bet on a swift economic recovery. The S&P 500 just pulled off its greatest 50-day rally in history, jumping 37% over the period.
The 60-40 strategy was not immune to the deep stock rout. When the pandemic roiled financial markets in March, the balanced fund dropped more than 20% from its peak in February, only the fourth time since World War II that it declined 20% or greater from a record.
Less effective?
Some analysts have long argued the 60-40 portfolio has lost its mojo due to historically low bond yields. As interest rates hit rock bottom, there's little room for bond prices to appreciate to mitigate losses on the equity side, they argued.
Goldman Sachs previously said the classic 60-40 rule is broken as the bank believes bond yields would need to turn "deeply negative" to buffer large losses in equities.
After hovering around just 1.75% in the past year, the 10-year Treasury yield dropped below 1% in March, hitting an all-time low of 0.318% and boosting prices, which move inversely to yields. The move was in part due to the Federal Reserve's unprecedented easing measures. It was trading around 0.8% on Thursday.
"With yields low or negative, I think it strains how much investors should allocate to this space," said Jim Paulsen, chief investment strategist at the Leuthold Group. "The question is not whether investors should adopt a balance … but rather whether much of the traditional fixed-income arena is still a viable alternative."
"Investors may opt to hold high-quality, high-dividend paying stocks as a surrogate for bonds" going forward, Paulsen said.
Over a two-year period, the 60-40 portfolio matched the S&P 500 performance, returning about 10%. With recent economic data showing improvement, many investors expect more gains in stocks ahead.
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Source: cnbc.com