Are 60-40 Investment Portfolios a Thing of the Past?

The 60-40 portfolio is a classic investment strategy. It involves putting 60% of your investments into stocks and 40% into bonds. It is viewed as a good way to diversify your portfolio and reduce risk. Moreover, the two often move in opposite directions, price-wise. When stocks fall in value, bonds often rise -- and vice versa.

But analysts at BlackRock are advising clients that the 60-40 portfolio has had its day. The team argue it's too simplistic and that investors can't just set and forget their portfolios in this climate.

Why BlackRock says 60-40 logic doesn't hold water today

High inflation is one of the main reasons the BlackRock team thinks investors need a new playbook. They advocate alternative ways to build more resilient portfolios that can better handle high interest rates and inflation. The analysts think we need to think harder about what sectors we invest in, and also be ready to change if things aren't working.

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Another route might involve considering different asset classes, such as commodities, or even holding cash. There are several high-yield savings accounts paying more than 4% right now. As Jean Boivin, head of the BlackRock Investment Institute, told CNN, "Cash is yielding, you know, 4% or 5% depending on how you implement this." He said the fact that you can already generate that kind of income just by sitting on cash sets the bar for asset allocation much higher.

Moreover, the analysts question the logic that stocks and bonds will continue to balance one another. Before 2022, the BlackRock report says there were only three times in almost a century when bonds didn't go up when stocks went down. Last year was the fourth, and the team thinks the factors we saw in 1969–70 are similar to the scenario at play today. "In that period, a combination of many factors including loose monetary policy, generous fiscal stimulus, and energy supply disruptions sparked a decade of higher inflation," says the note.

Is BlackRock right?

One big challenge about the current economic climate is that there's a lot of disagreement among economists and financial experts about what's likely to happen. We've just come through an unprecedented global pandemic, which has made it harder to predict what will happen next.

So, while BlackRock thinks investors need to look beyond a 60-40 allocation, Vanguard, another investment giant, says it's too soon to rip up the rules. It argues that one bad year is not enough to give up on a strategy that's delivered results for many years. "If you look at the nine years prior to 2022, a globally diversified portfolio posted a lofty 8.9% annualized return, despite the low interest rate environment," said Todd Schlanger, a senior investment strategist at Vanguard in a note.

Vanguard also argues that the pain of last year could mean stocks perform well in the coming decade. It thinks expected results have improved and there's less risk of downside. "Far from being dead, the 60/40 portfolio is poised for another strong decade," said Vanguard investment strategist Ziqi Tan.

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BlackRock's idea of being more nimble is also difficult for many long-term investors who carefully research and buy assets they plan to hold indefinitely. There's a fine line between deciding to sell stocks because something's not working and making emotional decisions based on a sudden drop in prices. However, high levels of uncertainty mean it may make sense to rebalance our portfolios more regularly. This can help manage risk and keep your investments on track.

What it means for investors

If you're a long-term investor, don't give up on a particular strategy just because of one bad year -- particularly a year that was bad for almost every asset class. Instead, consider whether BlackRock's logic holds water moving forward. If inflation and high interest rates continue, it's true that the trick will be to find ways to hedge against them. As BlackRock suggests, that might involve diversifying into other asset classes or taking a more active approach to your investments.

It's also worth bearing in mind that a 60-40 allocation was always only a starting point. People who are nearing retirement might opt for a higher ratio of bonds, while those who are just starting out and have many investing years ahead of them might favor more stocks. The right route depends on your stage in life, risk tolerance, and views on what might happen with inflation.