The 60/40 rule—allocating 60% of your portfolio to stocks and 40% to bonds—has long been a cornerstone of retirement planning. Stocks offer growth potential, while bonds provide stability and income. However, after a rough year for bonds in 2022, many investors began questioning whether this traditional strategy still holds up.
As we head into 2024, the 60/40 rule is seeing a renewed interest. Here’s why it might still be relevant for your retirement strategy.
The Appeal of the 60/40 Rule
The 60/40 portfolio is based on a simple premise: balance. Stocks have historically delivered higher long-term returns, averaging around 10% per year, but they are subject to market volatility. Bonds, on the other hand, offer more predictable returns, acting as a cushion during stock market downturns.
For investors approaching retirement, this balance is crucial. Bonds are intended to provide stability, while stocks help drive growth, especially in the years when retirement is still a distant goal. This strategy aims to smooth out the risks of the market while ensuring long-term financial health.
The Setback in 2022
The year 2022 was brutal for both stocks and bonds. The S&P 500 dropped 18.6%, and the Vanguard Total Bond Market Index lost 13.7%, marking one of the worst bond performances in nearly a century. This downturn raised serious concerns about the future of the 60/40 strategy.
The reason? Rising inflation and the Federal Reserve’s decision to increase interest rates. Typically, bonds are seen as a safe investment, but their value decreases when interest rates rise. As rates increase, newly issued bonds offer higher yields, making older bonds with lower rates less attractive. At the same time, inflation erodes the real value of the returns on bonds, making them less appealing for investors seeking to preserve purchasing power.
Is the 60/40 Rule Dead?
Despite the setbacks of 2022, there’s good news for those sticking to the 60/40 rule. In 2023, the portfolio bounced back with a 17.7% return, and through November 2024, the same portfolio has gained 15.5%. While 2022 was a tough year, looking at the broader picture, the 60/40 strategy is still delivering solid returns.
According to Jonathan Lee, senior portfolio manager at U.S. Bank, “60/40 is still a good benchmark for a balanced portfolio.” Todd Jablonski, global head of multi-asset investing for Principal Asset Management, agrees, calling the rule “very much alive.”
Why 60/40 is Still a Good Strategy
Despite the challenges in 2022, the 60/40 rule remains a useful strategy for many investors. The past decade has seen particularly strong performance for equities (stocks), which have benefited from a long period of low interest rates and a recovering economy. Even with the stock market’s current high valuations, the bond portion of the portfolio is becoming more attractive again.
Bonds, once considered “boring,” have gained traction as interest rates remain elevated, offering attractive yields. For instance, the yield on the 10-year U.S. Treasury bond is currently around 4.3%, which is higher than inflation, making bonds more appealing for income-seeking investors.
As Todd Schlanger, senior investment strategist at Vanguard, notes, “Bonds will make a more meaningful contribution over the next 10 years than they did in the last 10 years.” This shift makes the 60/40 rule an even more compelling option for long-term investors.
The Changing Landscape for Bonds
Bonds have become more attractive in 2024 as inflation has eased and interest rates remain elevated. New bonds are offering better returns, and the yield on U.S. Treasury bonds is competitive with inflation, making them a viable investment choice once again.
However, bond yields are also rising because of concerns about the federal government’s rising debt and the risk of a growing deficit. As the government borrows more, investors demand higher yields to compensate for the potential risk. This is helping to boost returns on bonds, which had previously been less favorable in the low-interest rate environment of the past decade.
What This Means for Your Retirement Portfolio
The 60/40 rule may not deliver the same explosive growth it did during the post-2008 recovery, but it remains a solid, balanced approach for retirement savings. Stocks, while still essential for long-term growth, are likely to see lower returns in the coming years due to their high valuations. On the other hand, bonds, once viewed as a dull investment, are poised to play a more significant role in providing steady income and mitigating risk.
For investors looking for stability and income, the 60/40 portfolio offers a tried-and-true approach. With bonds making a stronger comeback, the strategy remains relevant for those focused on long-term growth and security.
Conclusion: The 60/40 Rule is Still Relevant
Despite its struggles in 2022, the 60/40 rule is far from obsolete. With bonds now offering higher yields and stocks providing solid growth, this balanced portfolio approach continues to serve investors well, especially those looking for a combination of stability and growth in their retirement accounts.
The 60/40 strategy is still a strong choice for long-term investors, particularly as bond yields rise and inflation stabilizes. It may not have the same level of explosive returns as it did during the previous decade, but for most investors, the 60/40 rule remains a reliable foundation for a diversified and balanced retirement portfolio.
