Maybe the classic 60-40 stock-bond combo works well, after all. The changing nature of equity and fixed-income markets had some believing that the 60-40 mix had become a dull artifact of the past. Then came the travails of 2020 to reintroduce investors to the virtues of the old allocation.
The harsh realities of the pandemic and its toxic effect on the economy demonstrate the sturdiness of 60-40, according to the Vanguard Group’s mid-year investing review. The thesis behind having 60% of your portfolio in stocks and 40% in bonds or other safer assets is that this is the ideal balance between the need for investment growth, particularly in the good times, and ballast for when ill winds blow.
Last year, the Bloomberg Barclays US Aggregate, which measures investment grade bonds including Treasury issues, rose 8.7%. Now, that’s a far cry from the S&P 500’s 30.4% return in 2019, but the perceived safety of bonds has made them more appealing to a big chunk of investors since the 2008-09 financial crisis.
Many investors have gone bond heavy. The long-term trend continues of redemptions from stock mutual funds and inflow for bond funds, according to the Investment Company Institute (ICI).
But late last year, a research note published by Bank of America Global Research contended that “there are good reasons to reconsider the role of bonds in your portfolio,” and to tilt the mix toward stocks.
“The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies,” the note read.
Not so fast. For the first part of the year, through March 23, when investors were panicking over a seeming collapse of the economy, stock (in the form of the MSCI All Country World index) took a pounding, losing 31.7%, Vanguard wrote. But bonds, represented by the Barclays Agg, dipped a mere 0.1%. This was this despite a harrowing two-week stretch when investors were selling everything. The result was that the bonds’ better performance caused the 60-40 allocation to lose 20.1%.
Then, from March 24 through June 30, stocks soared 37.8% and bonds nudged up 3.6%. End result, for the year’s first half: Stocks lost only 6% and bonds gained 3.5% for a six-month portfolio total of 1.5% down.
Part of Vanguard’s rationale for why 60-40 should hold up going forward is that short-term interest rates are near zero, thanks to the Federal Reserve. Result: bond price appreciation has little runway left. If bond yields can’t go much lower, then their prices (which move in the opposite direction) can’t move much higher. But bonds still can fulfill their mission as a balancing influence for ever-volatile equity.
“The Fed expects to keep yields low till 2022,” said Andrew Patterson, a Vanguard senior economist, in an interview. “Bonds offset lows and temper highs” of stocks.