SUMMARY
The widely tracked mix of 60% equities and 40% bonds did badly in 2022. While we don’t believe this is reason to write this approach off, we prefer broader and more dynamic long-term investment plans.
In the world of asset allocation, the 60/40 portfolio is a household name.
For decades, many investors have followed this simple long-term investment plan, putting 60% of their portfolio in equities and 40% in bonds. And many more have used it as a benchmark for assessing their own allocations.
Over time, a 60/40 allocation would have delivered solid results. Between 1990 and 2023, a global version of such an allocation would have delivered a 4.4% annual return, assuming annual fees of 2.5%.1 That compares to a 2.6% return from just keeping the money in cash.
To put it another way, $100 invested in a 60/40 basis would have become $359 versus $235.
Lately, though, the 60/40 portfolio has drawn attention for the wrong reasons.
2022’s double whammy
In 2022, the 60/40 portfolio came unstuck. The global mix described above suffered a drawdown – or peak-to-trough decline of 17%. The reason? Both global equities and bonds had a rough time last year.
This is a rare occurrence. In many of the calendar years where equities have fallen, bonds have gone up.
Looking at equities and bonds only in the US, using data back to 1976, this was the first time the two have fallen simultaneously over a calendar year.
Indeed, that’s a big part of the rationale for this basic – but historically robust – portfolio: gains on one may help offset any losses on the other.
However, bonds entered 2022 with low yields by historical standards.
This left them vulnerable to the interest rate rises that followed during the year.
Back in the late 1970s and early 1980s, when rates also rose sharply, bonds held up better because their yields started from much higher levels.
Equities, meanwhile, suffered too from rising rates. Investors fretted that monetary tightening to choke off high inflation could tip the global economy into a recession.
So, is it game over for 60/40?
Many investors weren’t prepared to see 60/40 struggle as it did.
A slew of articles appeared speculating that perhaps this allocation had finally had its day.
However, reports of 60/40’s demise may have been very much exaggerated.
The sell-off in 2022 pushed equity and bond valuations down to more attractive levels.
And over time, lower valuations have tended to be followed by higher returns.
What’s more the macroeconomic outlook has brightened, with inflation easing in places.
As such, this allocation could revert to more typical patterns of performance in 2023 and beyond.
A more diversified approach
While the 60/40 allocation is a handy benchmark, we believe there are more attractive options available.
For suitable and qualified investors who are able to take on more risk, we believe it may make sense to add private equity, real estate, hedge funds and commodities to equity and bond allocations.
And rather than a static weighting – such as 60/40 – the allocations we build adapt to changes in the outlook.
So, if the returns for an asset class go up or down, the allocations typically do likewise.
Figure 1 compares a global 60/40 allocation’s returns between 1990 and 2023 with that of a more broadly diversified allocation: A more broadly diversified portfolio with a 30% allocation to Private Equity and Real Estate.
Over the period, the latter would have produced an annualized total return after 2.5% fees of 7.4% versus 4.4% for 60/40.
But in terms of risk, it had broadly similar volatility and worst peak-to-trough performance.
Figure 1. Diversified allocations and cash’s performance over time
| Annual Return | Annual Volatility | Sharpe Ratio | Max Drawdown | |
|---|---|---|---|---|
| Broadly diversified global allocation* net of 2.5% pa fees | 7.4% | 10.7% | 0.6 | -39% |
| Global 60/40 portfolio, net of 2.5% pa fees** | 4.4% | 10.2% | 0.4 | -37% |
| Cash | 2.6% | 0.7% | 0 | 0% |
Diversification does not guarantee a profit or ensure against a loss of principal. Source: Global Investment Lab using monthly Bloomberg data from February 1990 to March 2023. Cash is the US 3-month Government Bond Total Return Index (USD). AVS Level III Portfolio2 is a USD CPB Reference Level III Portfolio with a 30% allocation to PE/RE (private equity and real estate), net of an annual 2.5% performance fee on non PE/RE assets, and rebalanced monthly. HFs mean Hedge Funds. The specific allocation of the CPB Reference Level III Portfolio is 24% Developed Equities, 4% Emerging Equities, 25% Investment Grade Bonds, 3% High Yield Bonds, 3% Emerging Fixed Income, 10% Hedge Funds, 20% Private Equity, 10% Real Estate and 2% Cash. **Global 60/40 is a basket defined as a 60% weighting of the MSCI ACWI Total Return Index (USD) and 40% of the Bloomberg Global Aggregate Total Return Index (USD) net of an annual 2.5% performance fee, rebalanced monthly. An increased level of illiquidity in a portfolio may require a higher risk tolerance dependent upon your current investment objectives and risk tolerance. Benchmark indices were used to proxy asset classes within this basket. Please see below for a breakdown of the indices used as proxies for the asset classes in the basket. Risk Level III: Seeks modest capital appreciation and, secondly, capital preservation. The fully diversified portfolio was developed using Citi Private Bank’s proprietary asset allocation methodology. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results.
The bottom line
The 60/40 approach has come in for some harsh criticism in recent times.
However, we argue that’s important to focus on the long-term, both past and future.
The case for global diversification across asset classes and staying fully invested throughout market cycles remains intact.
In our view, both 60/40 and more broadly diversified allocations make more sense than holding large allocations to cash.
2Asset class index pairings
Global Cash |
US 3-Month Government Bond TR Index |
Global Developed Equities |
MSCI World Index |
Global Emerging Equities |
MSCI Emerging Markets Index |
Global Developed Investment Grade Fixed Income |
Bloomberg Barclays Global Aggregate Index |
Global Developed High Yield Fixed Income |
Bloomberg Barclays Global High Yield Index |
Emerging Market Fixed Income |
Bloomberg Emerging Markets Debt Local Currency Index |
Hedge Funds |
HFRI Fund Weighted Composite Index |
Private Equity |
MSCI World Small Cap Index and benchmarked against the S&P Listed Private Equity Index |
Real Estate |
NAREIT Global REIT Index |
