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Traditionally, a balanced portfolio of 60% stocks and 40% bonds has been the tried and true strategy for long-term investors. But does that formula still work?

The 'Collapse' of the 60/40 Portfolio For a long time, a 'balanced' portfolio of 60% stocks and 40% bonds was a tried-and-true strategy for pursuing goals of growth and capital preservation at the same time. When stocks do well, the portfolio benefits from growth. And when stocks do poorly, bonds are expected to mitigate the downside and reduce volatility. Many investors follow the popular adage that '100 minus your age' is how much you should allocate to stocks. But these long-held beliefs have been challenged recently. 2022 was a difficult year for both stocks and bonds, which also meant weak returns for 60/40 portfolios. Performance varies based on categories of stocks and bonds in a portfolio, but I'd venture to say that most 60/40 portfolios probably declined in the neighborhood of -15% in 2022, which marked the worst performance for that allocation since at least 1937. And to make matters harder for 60/40 investors, while stocks have staged a recovery in 2023, bonds continue to underperform as interest rates have been pressured higher by stronger-than-expected economic growth. 1 Just Released: New Zacks Stock Market Outlook Report! Free to Mitch on the Market readers, this report provides valuable insights to help investors make the best investment decisions to improve their investing portfolios. In this report, you will find key forecasts and facts to consider as we focus on the final quarter of 2023, such as: Top-down S&P 500 year-end 2023 target Setting return expectations for 2023 International update on key global regions And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! Download the November 2023 Stock Market Outlook Report Now! 2 This dynamic has many investors wondering if the benefits of the 60/40 portfolio are gone for good. But I wouldn't be so quick to leap to that conclusion. For most of history, bonds have been effective at mitigating equity market risk, and they have also helped portfolios generate positive returns during periods when equities sold off sharply. When it mattered most – i.e., during the 2008 Global Financial Crisis – bond prices soared in the wake of the 'flight to safety' into U.S. Treasuries. During the past 20 years, there has been a consistently negative correlation between stocks and bonds, with basically the only exception being 2013's "taper tantrum" when both declined in lockstep. As readers can see in the table below, long-duration U.S. Treasury bonds have held up remarkably well – and almost always delivered positive performance – during the biggest equity market drawdowns. 2022 is arguably the exception, not the rule. Period Cumulative Stock Market Return (S&P 500) Cumulative Long-Duration U.S. Treasury Bond Return November 2007 – February 2009 -50.9% +16.0% August 2002 – September 2002 -44.7% +28.5% December 1972 – September 1974 -42.6% -6.0% September 1987 – November 1987 -29.6% +2.7% December 1986 – June 1970 -29.3% -8.0% January 1962 – June 1962 -22.3% +4.0% Source: Morningstar, UBS 3 Now to be fair, there have also been several periods – sometimes long ones – where bonds and stocks were positively correlated. Those periods also happened to be ones where there was high inflation uncertainty, i.e., the 1970s and 1980s. Some have argued that an inflation rate of 2.5% is the point at which stocks and bonds flip in correlation from positive to negative or vice versa. During high inflation regimes, bonds suffer as coupon payments become less valuable and as investors demand higher yields, and stocks suffer from lower expected growth rates and cost pressures. High inflation can thus hurt both asset classes. Expectations for higher-than-average inflation do not mean it's time to abandon bonds in an investment portfolio, however. For one, inflation may continue to trend downward, and the Fed may find themselves in a situation where rate cuts make the most sense in 2024. That would likely benefit fixed-income performance. Second, it's important to remember that the fixed income portion of a portfolio can still serve all of the functions a long-term investor needs it to: generating cash flows, mitigating equity volatility risk, and preserving capital. This is especially true, in my view, when bonds in a portfolio are generally held to maturity (unless credit issues arise) and when duration is managed activity – both of which we do here at Zacks Investment Management. Bottom Line for Investors For the past couple of years, we have held a fairly cautious stance on fixed income as we anticipated rising rates, which led us to keep duration on the shorter end while focusing on higher credit quality bonds. Our decision-making also generated positive outcomes for our lower duration preferred stock portfolio, which mitigated the stock market's downside effectively last year – with our Preferred strategy declining -10% compared to the benchmark's -18% drop. Looking ahead, yields are now in a place where investors can stay on the short end of the curve and still earn a positive real (inflation-adjusted) return, which is of course a break from the previous low-inflation low-interest rate regime when investors were starved for yield. For fixed-income assets held to maturity, the goals of preserving capital and generating cash flow are back on the table. To provide our readers with a more in-depth perspective on the stock market and what can be anticipated from now until the year's end, I recommend downloading Zacks' latest Stock Market Outlook Report. 4 This report discloses facts and predictions to help guide your investing strategy for what's to come. For example, you'll discover Zacks's view on: Top-down S&P 500 year-end 2023 target Setting return expectations for 2023 What produces 2024 optimism What's alive for 2024 pessimists International update on key global regions And more… Prepare your portfolio for what lies ahead by reading this new report today. About Zacks Investment Management Zacks Investment Management was born out of one of the country's largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we've developed to design customized investment portfolios based on each client's individual needs. The end result is investment management that is research driven, results oriented and client focused. Talk to a Zacks Wealth Advisor today. © Zacks Investment Management  |  Privacy Policy 1 Wall Street Journal. October 19, 2023. 2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 3 UBS. 2023. 4 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. DISCLOSURE Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals. 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