60/40 Investment portfolio of bonds: Bad start in 2022

One of the most trusted and popular investment strategies is failing in 2022.

A 60/40 portfolio – made up of 60% of stocks and 40% of bonds, which is often the default recommendation to minimize risk while still enjoying growth – fell nearly 18% in 2022, the worst start for one year at least since 1976 according to an analysis by Bespoke Investment Group.

“Such an asset allocation started the year down by more than 6% twice earlier, in 2002 and 2008,” Bespoke Investment Group strategists wrote in a note to clients on Thursday. “Nothing is close to losing this year.”

The strategy is popular because it can offer a combination of equity growth potential and bond security. As Money reported earlier, from 1926 to 2020, the 60/40 portfolio generated an annual return of 9.1%, according to investment giant Vanguard Group.

But today, someone with a 601 (k) 60/40 retirement plan is not only coping with 40 years of high inflation and paying $ 5 a gallon at the gas station, but also “the biggest shock to their retirement portfolios since. the worst periods of the financial crisis, “said Bespoke strategists.

Why is the 60/40 investment portfolio doing poorly?

In general, financial assets suffer.

The S&P 500, an index commonly used to measure stock performance overall, officially entered the bear market this week, meaning its price has fallen 20% or more from its previous peak. Meanwhile, the bond market continues to suffer, with US government bond yields (which are moving in the opposite direction of bond prices) rising to their highest levels in a decade. Even the price of bitcoin fell by more than 60% from its highest level in November.

Financial markets rose after the collapse in March 2020 in the early days of the pandemic, inflated by stimulating government money and near-zero interest rates. But now the economic environment looks very different. Inflation has not been so high for decades, and in a bid to cut rising prices, the Federal Reserve announced on Wednesday that it was raising interest rates by 0.75%, the biggest increase since 1994. The Fed has already raised interest rates twice this year. .

Although raising interest rates is a tool to fight inflation, it also makes it harder for consumers and businesses to borrow and spend money and can hurt the prices of financial assets such as stocks. Investors are clearly worried about what the Fed’s moves mean for their money.

Bond and stock prices do not always fall at the same time – in fact, the attractiveness of a diversified portfolio is that when one asset falls, another will remain stable. This happened in March 2020, when treasury bonds held their positions as stocks fell.

When stocks collapsed in 2008 and 2009, the bonds “did not fall very far or for too long,” the Bespoke note said. “But this time it’s a very different story.”

The bonds yielded -11.7% total return this year, which they said “complements – and perhaps causes – the collapse in stock prices, instead of compensating for the bear market.”

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Do you need to have a 60/40 portfolio?

No distribution model is suitable for everyone, Arty Green, a financial planner at Cognizant Wealth Advisors in Los Altos, California, told Money last year.

“Does everyone wear size 10 shoes?” Green said. “If not, why would anyone use a 60/40 distribution to increase their savings?”

The investment plan must take into account the specific risk of the investor, the goals and the time horizon, and there have been criticisms that the 60/40 portfolio has no personalization and does not take into account assets outside stocks and bonds. Investors should also not impose a 60/40 ratio in their portfolio and never reconsider it; your allocations will probably need to be adjusted as you approach retirement.

However, this strategy can be a good starting point for investors, write strategists from LPL Financial in a note to customers this week.

While there may be opportunities for investors to consider more diversification, Bespoke strategists say the classic 60/40 portfolio is “very lively.”