A Eulogy for the 60/40 Portfolio

The 60/40 portfolio passed away on October 16, 2019, from complications of low interest rates and a bad case of Fed manipulation. This is the 27th time 60/40 has died in the past decade but enemies market timing, day traders, and alternative investments are hopeful it will stick this time around.

60/40 was 91 years old and lived a long and prosperous life, returning more than 8.1% a year. This nearly matched the return of 60/40’s best friend, the S&P 500 (9.5%) but it did so with 40% less volatility.

60/40 was such a bright light in a world often full of darkness. It was down in just 20 of its 91 years on this planet. And it was just 4 years old when it had its worst year in 1931 (down 27%).

60/40 finished out its life strong, returning an astonishing 10.2% per year from 1980-2018 with just 5 down years over the past 39 years. That was much better than the 6.9% annual return from the day the portfolio was born in 1928 through 1979.

There were some lean years when 60/40 was learning how to walk early on. After rising 27% by the time it turned one, 60/40 fell 40% over the next four years during the Great Depression.

60/40 set a good example, as it was the most popular benchmark to which other investment portfolios often compared themselves. Many were envious of the performance of the 60/40 portfolio because it was so simple. They could never wrap their heads around the fact that a mix of stocks and bonds, rebalanced periodically, could outperform so much of the professional investment universe.

I’ve shared many a conversation with 60/40 over beers about how complex so many professional investors try to make their portfolio. 60/40 would often shake its head and laugh when thinking about it. I’ll miss those conversations.

Two of 60/40’s most redeeming qualities were balance and risk mitigation. There were just four times in the portfolio’s 91-year history that both stocks and bonds fell during the same year: 1931, 1941, 1969 and most recently in 2018.

60/40 was always there for its investor friends when they needed it but it did have a wild side that would rear its ugly head from time to time. The stock portion of its personality was down 25 years of its 91-year lifetime. The average loss for stocks during those 25 years was more than 13%. But 60/40 had a more stable, rational side of its personality that balanced out these wild times. During those 25 down years in the stock market, bonds averaged a gain of more than 5%, dampening some of the losses and allowing 60/40 to live to fight another day when things got bad.

60/40 was remarkably stable and someone you could count on over the long haul. It never had a 10-year period where it lost money. Many of you will remember that 10-year stretch from ’82 to ’91 where 60/40 went on a ridiculous run, returning nearly 350%. In 5 out of those 10 years, it saw returns of more than 20% and four of those years were over 30%! We all had a blast despite that wicked hangover from the Black Monday party in 1987.

But even when things were the bleakest, from 1929-1938, 60/40 still earned a respectable 20% total return, even in the face of mounting adversity.

Investors will now have to grapple with the fact that with the passing of the 60/40 portfolio, diversification is also dead. One of 60/40’s early mentors, Peter Bernstein once said, “Diversification is the only rational deployment of our ignorance.” It’s a shame we will now have to figure out other ways to deploy our ignorance if stocks and bonds no longer offset one another.

It’s sad because 60/40 didn’t have to end this way. Investors could have simply diversified more widely across different geographies, asset classes and strategies, saved more money or adjusted their expectations.

60/40 is survived by its immediate family — wife, asset allocation, and children Vanguard, rebalancing and comprehensive investment planning. Distant relatives include crypto, pot stocks, and technology IPOs but they were all left out of the will.

Donations can be made to your own IRA, 401k, or brokerage account on a regular basis in 60/40’s honor.

RIP 60/40 portfolio. You will be missed. I hope to see you again someday in the big retirement portfolio in the sky, where interest rates are always 6% and stock market valuations never go above 15x the previous 10 years’ worth of average earnings.

 
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