The 60/40 portfolio, a tried-and-true long-term investment strategy, has had its worst year since 1936, according to Bank of America Global Research data. A recent synchronized selloff of stocks and bonds is to blame.
The popular split of 60% stocks to 40% bonds was down 19.4% year-to-date through the end of August. During the period, the S&P 500 dropped more than 16%; long-term Treasuries, 20%; and investment grade corporate credit, 13%, BofA reported.
The S&P 500 has erased about half its 17% gains after recouping from mid-June lows through mid-August highs, suggesting a “typical bear market rally,” BofA said in a report.
“Our bull market signposts continue to show no real signs of a bottom,” it said. "September has seasonally been a weak month (second weakest avg. return of +0.1% & hit rate of 56%) and we expect more pain in the market with our 3,600 year-end forecast."
The challenges for investors extend beyond stocks to the bond market, the weak 60/40 portfolio performance indicates, though they may not be significant.
"Brief, simultaneous declines in stocks and bonds are not unusual," Vanguard’s Chief Economist for the Americas, Roger Aliaga-Díaz, wrote in a note in July. “Viewed monthly since early 1976, the nominal total returns of both U.S. stocks and investment-grade bonds have been negative nearly 15% of the time. That's a month of joint declines every seven months or so, on average.”
Beyond the seven-month time period, joint declines have occurred less often. “Over the last 46 years, investors never encountered a three-year span of losses in both asset classes,” Aliaga-Diaz wrote.
The 60/40 strategy aims to reap average annual returns of 7%, though most years will not have a 7% return. Hence, the long-term nature of this investment strategy.
"This isn't the first time the 60/40 and the markets in general have faced difficulties — and it won't be the last," Aliaga-Díaz wrote. "Our models suggest that further economic travails lie ahead and that market returns will still be muted. But the 60/40 portfolio and its variations are not dead."