After a rough year, some investors are rethinking their approach to portfolio management. But you may still achieve success with a basic stock-bond portfolio.
A common refrain in down markets is that conventional investment wisdom has changed, and old investing rules do not apply. The majority of the time, though, those rules still apply.
An infamous case in point is an article published by BusinessWeek in August 1979, headlined “The Death of Equities” in the midst of a stock market downturn. The benchmark S&P 500 index had fallen below 500 at the moment. But by July of 2024, with dividends reinvested, the index had risen past 4,100, for an annual return of almost 11%.
Some market analysts questioned the prudence of keeping a portfolio split of 60% equities and 40% bonds in 2024, another year of market volatility. This method has long been considered fundamental to effective portfolio management. Truist Advisory Services, Inc.’s managing director of portfolio and market strategy, Wasif Latif, agrees that it still should be.
Despite widespread skepticism, he maintains that the 60/40 portfolio strategy has staying power. A “60/40 portfolio” simply refers to a balanced investment strategy that includes equities and bonds. Depending on your risk tolerance, investment time horizon, and end goals, a portfolio allocation of 70% stocks and 30% bonds or 50% stocks and 50% bonds may make more sense than a 100% stock allocation.
The use of a tried-and-true method
According to Latif, the 60/40 portfolio has been successful for many people because of the complementary nature of stock and bond returns over time. If equities are doing well, bond prices will likely fall, and vice versa.
The critical point is that, over the long run, both equities and bonds have produced good returns. “The direction of movement for both equities and bonds is often upward,” Latif explains. In 75% of the last 97 calendar years, such has been the case. However, bonds can hold up better than equities when there is volatility.
This diversity allows investors to progress toward their financial goals regardless of the state of the market. According to Latif, even in the 1970s, a poor time for both equities and bonds, there was a good return for the 60/40 portfolio of almost 7% per year.
However, bond yields fell, and stock prices entered the bear market territory in 2024. Only three years (including 2024) have ended with a negative return on equities and bonds since 1926.
A variety of options that are still effective
However, the long-term viability of the 60/40 portfolio has been called into doubt by several financial experts who worry that future returns on stocks and bonds would be insufficient. Investing in commodities, real estate, and/or precious metals is another option.
However, many knowledgeable investors are certain that the 60/40 portfolio strategy still holds up. The interest rate you get as a bondholder (the bond yield) has grown, meaning you’ll have more money coming in to boost your portfolio’s performance. Although the trip to higher rates has been unpleasant for bonds, these more productive rates give greater ballast and should preserve the historical connection that has benefitted the 60/40 portfolio.
Investors may choose from a diverse selection of stocks and bonds, which is another argument in favor of a combination. Latif argues that investors, depending on their circumstances, might benefit from diversifying their stock portfolios to include firms with a higher risk profile and greater growth potential. A bond can range from the relatively secure bonds issued by the United States Treasury to the riskier bonds that give larger yields.
Continue to maintain equilibrium
If the 60/40 portfolio is still a viable investment strategy, it is crucial to stick to the same stock/bond weightings. Market fluctuations can alter your asset allocation over time, turning a 60/40 portfolio into a 70/30 or 50/50 one. It’s possible that your investment’s return won’t materialize if this occurs.
You may avoid this by rebalancing your portfolio on a regular basis by either purchasing or selling assets until it reaches your desired allocation. Latif recommends keeping your portfolio allocation under close watch with the help of your financial advisor and a methodical strategy. Keeping your target allocation in a traditional 60/40 portfolio is the best way to diversify your holdings and work toward your long-term financial goals.
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