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The 60/40 Portfolio

March 10, 2023
clock 6 MIN READ

Indeed, 2022 was a bad year

Every few years, the 60/40 portfolio comes under attack when its combination of 60% stocks and 40% bonds fails to deliver the typically attractive returns investors expect. The strategy, which is widely viewed as “less risky” for the average investor, certainly took its lumps in 2022 when stocks and bonds both experienced losses. Some in the media have already pronounced “time of death” on the 60/40 strategy.1

Not so fast

Despite the poor showing in 2022, SEI believes that giving up on the 60/40 strategy is shortsighted, exaggerated, and frankly, wrong. First, the portfolio, which typically includes 60% U.S. or globally diversified stocks, and 40% U.S. bonds, isn’t right for everyone. We take a different view and construct portfolios designed to achieve a specific outcome, which often results in allocations that diverge from the standard 60/40. We know from our research that a typical 60/40 historically takes a large share of its overall volatility from its equity allocation (upwards of 90%, in fact). That’s why we may not design a portfolio with a 60% exposure to equities, but one that we’d expect to be comparable to a 60/40’s long-term performance.

60/40s aren’t all created equal

Not all of our portfolios look the same under the hood—even those that share a similar broad mix of stocks and bonds. The style of a 60/40 portfolio’s underlying components may vary based on a client’s goals. For instance, a managed volatility approach to equity investing is often appropriate for portfolios designed to provide steady cash flow.

Likewise, not all equity and bond exposures the same, nor are they appropriate for all investors. For instance, we primarily use a combination of high-quality and high-yield municipals bonds in investors’ taxable accounts, while taxable bonds are used in tax-advantaged accounts like IRAs. Investors shouldn’t use a one-size-fits-all approach to portfolio construction. They should seek greater diversification.

We also tilt portfolio allocations based on our forward view of the markets and do not dogmatically insist that the same allocation or investment mix is right in every environment or for every investor. For example, in 2022 many of our portfolios headed into the year as short-duration, a measure of interest rate risk, in anticipation of climbing interest rates. Additionally, we leaned heavily into value-oriented areas of the equity markets by underweighting expensive growth stocks that led portfolios in the later months of 2020 and 2021.

Management makes a difference

Active management historically delivers some of its strongest relative returns in volatile or negative periods, and 2022 was no different. Our active management decisions not to mirror the indexes paid off across both the equity and bond markets. This active positioning, as well as strong performance from underlying managers, benefitted our clients and led to results that look quite different than the average 60/40 investor’s experience. Most critically, our clients weren’t startled by uncharacteristic or surprising performance in 2022 in the context of the expectations we set around their investment strategies. Despite it being a challenging year, our goals-based philosophy kept them holding firm to their long-term goals.

2023 outlook: Brighter days ahead

We believe that 2023 could set up for another strong environment for active management given the potential for continued volatility and the cyclical uptrend we’re seeing in more diverse equity portfolios relative to passive indexes. Looking forward, the 60/40 portfolio, and perhaps most well-diversified allocations, are likely to see brighter days after one of the most challenging years in recent memory. We take the view of investors rather than traders, and through that lens, we believe things look better for prospective returns across a range of asset classes.

  • Forward-looking price-to-earnings multiples for U.S. stocks stand at 17x compared to a 10-year average of 18x, and they came into the year at 22.5x. So, if you liked stocks heading into 2022 as so many did, buying or maintaining the appropriate level of exposure at a nearly 25% discount should look more enticing.
  • Non-U.S. stocks are attractively priced and currently stand at 12.6x earnings compared to more than 14x over the past 10 years. That equates to a more than 25% discount to U.S. stocks. Last year, this divergence led to developed market equities outpacing U.S. stocks for the first time since 2017.
  • Bond yields are up dramatically and improve prospective return expectations. The Bloomberg U.S. Aggregate Bond Index had an average yield of nearly 4.7% at year-end compared to 1.75% at the end of 2021, an increase of nearly 170%. Municipal yields experienced an even more impressive gain, yielding 3.55% on average at the end of 2022 versus 1.1% in 2021, a 220% increase.

Because of the current economic climate, we expect 2023 could be another choppy year in the markets. Still, there is plenty of room for optimism for investors with the right mindset. More appropriately valued stocks and bond yields at multiyear highs should have you feeling confident in your strategy’s ability to achieve your objectives and remain committed to your goals.

1Steve Garmhausen, “The 60/40 Portfolio Is Dead. Here’s How Advisors Are Replacing It.” Barron’s, November 4, 2021.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

 There are risks involved with investing, including loss of principal. Diversification does not ensure a profit or guarantee against a loss. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments.

Past performance does not guarantee future results. Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.

Neither SEI nor its subsidiaries provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

SEI Private Wealth Management is an umbrella name for various wealth services provided through SEI Investments Management Corporation, a registered investment advisor. Investing involves risk including possible loss of principal.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its subsidiaries assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI.

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).

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