The 60/40 portfolio is a staple in the asset allocation space. While suffering in 2022, the 60/40 has gotten back more in-line with expectations the last few years.
The 60/40 equity/bond portfolio has been proclaimed “dead” over the last few years. Really, it’s been the 40 that’s been dead as bonds just saw their three-year rolling return turn positive for the first time in three years. On the other hand, equities have been the only game in town putting in back-to-back 20% annual returns which has kept the overall 60/40 idea afloat since a horrendous 2022. Incredibly, going back to 2019, the SPX has gained at least 20% in a calendar year four times in six completed years. The last time we saw this level of consistent equity returns was the mid-1990s, which was followed by a less than stellar early 2000s. This isn’t a call for a repeat, but a note that it’s rare for equities to do this well over a six-year period. Despite a poor equity market in the early 2000s, bonds did exceptionally well, as AGG put together positive annual performances from 2000 until 2004. The reason 2022 was so bad for the traditional asset allocation portfolio was the magnitude of AGG’s negative performance. AGG was down nearly 15% in 2022. Other than 2022, AGG’s worst annual performance on a price return basis was -4.19% in 2013. Outside of 2022, the 60/40 portfolio has been in-line with expectations over the last few years.
To visualize the relationship between equities, bonds, and the 60/40 portfolio, the graph below shows the rolling three-year cumulative returns for each asset on a price return basis. It might not be noticeable on the graph, but AGG’s three-year return just turned positive for the first time since early 2022. A lot of that has to do with the 2022 data rolling off the three-year calculation, but this was the longest period of rolling three-year negative performance in our dataset. Moving on to equities, SPX has a three-year rolling cumulative return north of 60%, which is strong when compared to the last 25 years but pales in comparison to the mid-to-late 1990s. Lastly, the 60/40 portfolio is nearing a three-year cumulative return of 40% which was only eclipsed in the periods following the GFC and Covid crashes since 2000. The mid-to-late 1990s were a boon for both equities and bonds as the rolling three-year return for the 60/40 portfolio routinely sat between 40-60%. To put that in perspective, that’s like owning equities and bonds since roughly the time of the 2022 bottom and then having the next few years produce even better returns.
Overall, the “asset-allocation” portfolio is closing in on “rich” levels historically, but it does have precedent to continue to push further to the upside. However, if we see the 60/40 up more than 50% in a three-year period soon, it may be a good time to be cautious. From an equities perspective, the picture already looks “rich”, but they can certainly continue higher. Nonetheless, this is a great talking point with clients, especially those near/at retirement that want to be aggressive with the expectation that the market will continue to do what it’s done in the last three years. For clients at this stage of life, it’s worth having another conversation about goals/risk with the framing that the market has done very well in the last few years, but let’s not forget about our financial milestones. Achieving those goals and milestones may be more so on the capital preservation side than the growth side given the strong returns over the last few years. This is likely a busy time for client meetings as the summer has ended and the holidays are still a couple of months away, so it’s a great time to remind clients of their financial goals and what is needed to achieve them.
