3 Myths About the 60/40 Portfolio
By Godfrey Yu
This year may very well mark the resurgence of the 60/40 Balanced Fund. In 2022, with bonds falling in tandem with stocks, it appeared to many investors the final nail was being hammered into the classic portfolio’s coffin—with several analysts declaring the 60/40 dead. This proclamation, however, proved to be unfounded.
A traditional balanced portfolio has roughly 60% of assets in equities and 40% in bonds or other fixed-income securities, providing investors with a safe way to capture growth and mitigate risk. Typically, when stocks go up, bonds go down and vice versa, which can offset the downside. In 2022, this expectation was challenged. And, like many market events, which are temporary, the move was enough to fuel rumours of its demise.
Here are the three biggest myths about the 60/40 portfolio.
Myth #1: Low Interest Rates Killed Fixed Income
The Bank of Canada’s Target for the Overnight Rate
| Low | 2022-03-02 | 0.25% |
| Average | 2013-02-28 - 2023-02-27 | 1.02% |
| High | 2023-02-27 | 4.5% |
Source: Bank of Canada
Going back to 2008 and 2009, shortly after the financial crisis, governments all over the world began to stimulate the economy by aggressively reducing interest rates. For nearly a decade, central banks kept interest rates artificially low.
The Bank of Canada, for example, averaged an overnight rate of 1.02% during that time and in other places in the world, such as Europe and Japan, borrowing rates even went negative.
For investors, this meant less income from their fixed income holdings. But when the COVID-19 pandemic spurred another round of cuts, inflation began creeping up, driving central banks to reverse course and finally raise interest rates.
Related read: Why Inflation is Less Harmful Than You May Think
Today, a 10-year Canadian Federal Bond yield is 3.37%, which gives investors substantially more payoff from their fixed income holdings than at any time in the past decade. In other words, the era of artificially low interest rates is at an end—and fixed income has emerged very much alive.
Myth #2: 2022 Proved Fixed Income is a Bad Hedge to Equities
Generating income is one facet of fixed income; the other is its ability to hedge equities. While stocks and bonds dropped in tandem in 2022, it’s unusual for both sides of the portfolio to come under pressure at the same time. The last time it happened was in 1994.1
Consider the above chart, which tracks U.S. equity and fixed income returns over the last 45 years. When equities took a big dive in the early 2000s, and again in 2018, bonds stayed relatively stable—in some cases, experiencing growth in that period.
It is important to remember that fixed income typically has two roles within a portfolio: producing yield and providing downside protection. Until the outlier event in 2022, it largely did its job of limiting the impact of potential losses from several market downturns.
Myth #3: It’s Best to Go Big or Go Home
A general sense of unease can wash over investors when markets become turbulent. Do you trust the plan? Or abandon ship in search of something that’s working today?
It may be instinctual to rush toward the shiny new object, but often in the world of investments, boring is better. Having an investor’s discipline to maintain diversification is important to achieve those shorter and longer-term goals.
Research has shown that asset allocation is a primary driver of performance, accounting for an average of 93.6% of portfolio returns. Depending on what’s happening in the economy, the asset class that may be “winning” today might not be “winning” tomorrow. For instance, the performance chart below shows how each asset class’s fortune has changed from year to year.
The Bottom Line
You shouldn’t put all your eggs in one basket. While the best asset allocation decisions should be based on the Advisor’s knowledge of the client—including objectives, time horizons and overall risk tolerances—a diversified portfolio helps balance the odds of capturing gains versus losses in any one area. At JCIC, our balanced portfolio is classified as low to medium risk, which is a great solution for investors looking for a reasonable risk-return tradeoff over the long term.
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