S&P 500 had worst half in 50 years, but the 60/40 portfolio isn’t dead

Stock trader on the floor of the New York Stock Exchange.

Spencer Platt | Getty Images News | beautiful pictures

The S&P 500 Indexa barometer of US stocks, just got worst first half of the year going back more than 50 years.

The index has fallen 20.6 percent in the past six months, from its peak in early January – its steepest drop since 1970, when investors Worried about decade-high inflation.

Meanwhile, bonds are also affected. The Bloomberg US General The bond index fell more than 10% year-over-year.

The move could cause investors to rethink their asset allocation strategies.

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While the 60/40 portfolio – a classic asset allocation strategy – may be suffering, financial advisors and experts don’t think investors should sound the death knell for it. . But it may need adjustment.

“It’s stressful, but it’s not dead,” said Allan Roth, a certified financial planner based in Colorado and founder of Wealth Logic.

How the 60/40 Portfolio Strategy Works

The strategy allocates 60% to stocks and 40% to bonds – a traditional portfolio with a moderate level of risk.

More generally, “60/40” is shorthand for the broader topic of investment diversification. The thinking is: When stocks (the growth engine of a portfolio) underperform, bonds act as a support because they often don’t move in tandem.

The classic 60/40 mix includes U.S. equities and investment-grade bonds (like U.S. Treasuries and high-quality corporate debt), said Amy Arnott, a portfolio strategist at Morningstar. ).

Market conditions have emphasized the 60/40 combination

US stocks reacted by plunge into a bear marketwhile bonds have also sunk to some extent not seen for many years.

As a result, the 60/40 average portfolio is struggling: It’s down 16.9% this year through June 30, according to Arnott.

If it were to hold, that performance would fall behind only two recession-era recessions, in 1931 and 1937, with losses of up to 20%, according to one report. analysis by Ben Carlson, director of institutional wealth management at New York-based Ritholtz Wealth Management, has historically delivered 60/40 annual returns.

‘Still no better alternative’

Of course, the year isn’t over yet; and it’s impossible to predict whether (and how) things will get better or worse from here.

And the list of other good options is slim, at a time when most asset classes are going bad, according to financial advisors.

If you’re using cash now, you’re losing 8.5% a year.

Jeffrey Levine

planning director at Buckingham Wealth Partners

“Fine, so you think the 60/40 portfolio is dead,” said Jeffrey Levine, CFP and director of planning at Buckingham Wealth Partners. “If you were a long-term investor, what else would you do with your money?

“If you’re using cash right now, you’re losing 8.5% a year,” he added.

Levine, who is based in St. Louis, said: “There is still no better alternative. “When you are faced with a list of inconvenient options, you choose the ones that are least inconvenient.”

Investors may need to recalibrate their approach

While a 60/40 portfolio may not be outdated, investors may need to recalibrate their approach, experts say.

“Not just 60/40, but what’s in 60/40” is also important, Levine says.

But first, investors should review their overall asset allocation. Maybe 60/40 – a middle strategy, not too conservative or aggressive – isn’t right for you.

Getting the right one depends on many factors that switch between emotions and math, such as your financial goals, when you plan to retire, your lifespan, how comfortable you are with volatility. , how much you want to spend in retirement and how ready you are. back that spending when the market goes down, Levine said.

Diversification ‘like an insurance policy’

The current market has also proven the value of diversifying more widely into the bond-equity mix, Arnott said.

For example, adding diversification of the stock and bond portfolios under the 60/40 strategy has resulted in an overall loss of about 13.9% for the year to June 30, improving the loss to 16, 9% compared to the classic version that combines US stocks and investment-grade bonds, according to Arnott.

(Arnott’s more diversified experimental portfolio allocates 20% each to large-cap US stocks and investment-grade bonds; 10% to each of developed and emerging market stocks, global bonds) and high-yield bonds; and 5% per small-cap stocks, commodities, gold and real estate investment trusts.)

“We haven’t seen the [diversification] “Diversification,” she said, is like an insurance policy, in the sense that it has costs and may not always pay off.

“But when it happens, you can be happy to have it,” added Arnott.

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