The 60/40 rule is a basic principle of investing. They should aim to keep 60% of their assets in stocks and 40% in bonds.
Stocks can provide solid returns, but they are volatile. Bonds provide a small but stable income and act as a cushion when stock prices decline.
The 60/40 rule is one of the most well-known principles in personal finance. However, a while ago, much of the investment community moved away from investing.
A chorus of essays and think pieces in 2023 and early 2024 asked whether a 60/40 portfolio is right. was deadexplained why it is no longer possible good enough To maintain a balanced portfolio, investment alternatives.
Reason: 2022. Bonds suffered their worst year on record, hit by the one-two punch of accelerating inflation and rising interest rates.
Take advantage of high interest rates: Current highest CD rate
But as 2024 draws to a close, investor support is once again closer to 60/40.
Should investors still follow the 60/40 rule?
in recent reportsVanguard Investment Company, reaffirmed 60/40 as “a great starting point for long-term investors, and that is as true today as it has been at any time in history.”
Other investment experts agree.
“640 remains a good benchmark for a balanced portfolio,” said Jonathan Lee, senior portfolio manager at US Bank.
And Todd Jablonski, global head of multi-asset investing at Principal Asset Management, believes the 60/40 rule is “very much alive.” I was able to make some mark twain jokes” he said.
The 60/40 rule grew out of the conventional wisdom that you need to balance your investment portfolio, especially as you approach retirement.
Stocks can bring the following benefits Approximately 10% per yearinvestors can earn much higher interest rates than they would receive on a regular bank account. However, the stock market is fickle and can plummet during recessions.
Bonds are supposed to be safe, predictable, and boring, making them the perfect foil to stocks. At least in theory, when stocks go down, bonds go up.
'Boring' bonds are in big trouble in 2022
But the events of 2022 seem to have made the market listen. According to the S&P 500, stocks lost 18.6% of their value, and according to the Vanguard Total Bond Market Index, bonds lost 13.7% of their value. After inflation, bond returns were the worst in 97 years, according to Nasdaq analysis.
The bond debacle has some investors wondering whether it's time to rewrite the rules of retirement savings, including the 60/40 rule.
Here's why bonds crashed: In 2022, the Federal Reserve embarked on a dramatic interest rate hike campaign in response to inflation reaching a 40-year high.
That was bad for bonds. Bond funds tend to decline in value when interest rates rise or inflation accelerates.
As interest rates rise, yields on newly issued bonds tend to rise. Older bonds therefore have lower yields, making them less attractive. This cycle drives down the value of bond funds.
Rising inflation erodes the value of bonds, making them less attractive. If a bond pays 4% interest and inflation reaches 5%, the bond's effective rate of return is negative.
Even before 2022, bonds didn't perform that well. Interest rates have remained at historically low levels for most of 2008, due to the impact of the Great Recession and the subsequent COVID-19 pandemic. Investors generally receive less return on bonds. when interest rates are low.
“I think investors started looking at bonds and saying, 'How far can stocks go?'” Jablonski said.
The 60/40 situation will change in 2024
Today, the bond landscape is very different. Inflation has eased. Interest rates have fallen but remain high, meaning new bonds are generating solid returns.
And investors who follow the 60/40 rule are doing pretty well.
According to Jablonski's calculations, the 60/40 portfolio lost 15.8% in 2022. But in 2023, the same portfolio rose 17.7%. And this year through Nov. 6, 60/40 investors were up 15.5%.
“This is a pretty good level of profit,” he said.
Even including the disastrous numbers for 2022, a 60/40 portfolio has averaged an annual gain of 6.9% over the past 10 years, according to Vanguard research.
“The last 10 years have been good for 60/40 because stocks, stocks, have performed particularly well,” said Todd Schlanger, senior investment strategist at Vanguard and author of the October report. ” he said.
With the stock market soaring right now, investors should expect stock price appreciation to decline slightly over the next few years. By historical standards, the stock market is overvalued.
As a result, “60/40 returns are likely to be lower than they have been over the past 10 years,” Schlanger said.
But don't blame the bonds.
Schlanger said bonds “will make a more meaningful contribution over the next 10 years than they have over the past 10 years.”
The current yield on the benchmark 10-year government bond is Approximately 4.3%reported CNBC. Yield is the annual interest rate that an investor receives over the life of a bond. And currently, yields are higher than the rate of inflation.
“People are getting more interested in bonds because interest rates are higher than they used to be,” Lee said.
Bonds are falling.Is there still a place for them in your retirement account?
Bond yields rise with deficits
One reason bond yields are particularly high over the long term is that investors are concerned about rising federal debt.
Interest rates on 10-year government bonds have risen to record levels. Highest level in recent months Wednesday, following news of Donald Trump's election to a second term as president.
Trump campaigned on lower taxes. Economists predict that President Trump's tax policies will widen the federal deficit, the shortfall between spending and revenue. deficit continues at $1.8 trillion.
“The risk to the market with a Trump presidency is an undisciplined fiscal situation. At some point in 2025, deficits will capture the market narrative,” said a fixed-income investor at Eagle Asset Management in St. Petersburg, Florida. James Camp, managing director of strategic interests, told Reuters.
Jablonski said bond yields are rising, at least in part, because investors see greater risk in governments living beyond their means.
And therein lies another golden rule of finance. That means borrowers with poor credit have to pay higher interest rates, even if it's the government.
