2 Reasons 2022 Challenged the 60/40 Portfolio Strategy

The 60/40 allocation strategy is frequently recommended when beginning your investing journey. With 60% of your portfolio in equities and 40% in bonds or other fixed-income investments, this approach has traditionally provided a balanced benefit, with high growth potential from stocks and a safety net from bonds^[1]. The assumption was that stock and bond markets would not dip at the same time, mitigating risk and enabling long-term growth of investment accounts. However, the 2022 economy has brought the classic 60/40 allocation strategy into question as both the stock and bond markets dip at the same time.

Stock Markets Take a Dip

Historically, stocks have fared well in environments of low inflation and low-interest rates. However, 2022 has recorded the highest inflation levels in 40 years, motivating the Federal Reserve to raise rates six times in a single year.^[2] Stock prices have dropped substantially in 2022 due to high inflation, rising interest rates, and economic uncertainty.^[3] Because stocks account for 60% of a 60/40 portfolio, their drop has caused the portfolio’s value to plummet. The problem is compounded by the fact that equities are more volatile than bonds, therefore a minor change in them has a large impact on an allocated 60/40 investment account.^[4] Even though the stock market may recover as the economy bounces back, the extent of recovery for these portfolios is uncertain and may alter how you choose to spend or maintain investments in retirement.

2. Bond Markets Drop Too!

Historically, bond values increase (and yields drop) when the economy suffers and markets trend downwards. However, bonds have risen in recent years in economies with lower inflation and lower interest rates, just as stocks have. In 2016, bond yields fell as low as 0.69%, and government bonds even offered negative yields in 2018, as bond values soared.^[5] Just as this trajectory was turning around due to pandemic factors, high inflation and rising borrowing costs sent the bond market down by 14% in 2022, once again decreasing their value. In a 60/40 allocation, this negatively affects the whole portfolio. The intended safety net failed at providing the protection many anticipated, impacting people’s retirement timelines.

The economic uncertainty in 2022 has disrupted this classic allocation model, prompting many to rethink where and how they invest their hard-earned money. While various financial professionals have suggested new allocation strategies, many investors do not feel confident in putting their funds at risk. To find out what investment strategy works best for you and your retirement goals, talk to us today and get a personalized complimentary review of your finances.