60/40 investing: will 2024 match 2023’s bumper year?

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

This article was originally published in This is Money.

Much has been made of the failure of 60/40 in 2022. And rightly so. Many investors have put faith in the strategy. It follows a common philosophy in finance, diversifying your assets by putting 60% in equities and the remainder in bonds.

The theory is that commonly one will rise when the other one falls, helping to smooth the trajectory of the value of your savings; a less rocky ride is particularly important for those approaching retirement.

Those on the cusp of retirement would have been dismayed when 60/40 investing failed miserably in 2022. Using US markets as an example, both stock markets and bonds scored losses simultaneously, 18% and 15% respectively, resulting in a combined loss of 16.8%.

Such unexpected turbulence will have derailed retirement plans for some, although it shouldn’t be forgotten that the reason for the bond crash was rising interest rates. Those shell-shocked retirees now at least have a wider choice of higher income assets to pick from.

Thankfully, 60/40 losses are relatively rare, at least by calendar year, happening in only 34 of the last 151 years. Last year’s slump of almost 17% was exceptional and the worst since 1931 - a brutal 26.2% down year.

So negative years are rare but double-loss years - when both asset types register losses - are even rarer. It has only happened on a handful of occasions and nearly always during times of extreme financial stress: the American Civil War, the 1907 banking crisis, the aftermath of the First World War and the oil crisis of the early 1970s.

That 2022 can rub shoulders with such bleak years of uncertainty underlines what unusual financial times we have been living through.

The rare years when equities and bonds both fell together

Source: Refinitiv, December 2023 in US dollar terms 

Please be aware that past performance is not a reliable guide indicator of future returns

On a brighter note, 60/40 looks set to return to rude health in 2023. By the end of November, investors had achieved a 12.2% return, with 21% from shares and -1% from bonds. In fact, in November the strategy posted its highest return in more than 30 years. This is because the “Super Seven” giant growth stocks that dominate the US market have powered up again while bonds, a disappointment for much of the year, are benefiting from a growing expectation of lower inflation and rate cuts in 2024. That trend may continue if inflation pressure continues to ebb.

Is 60/40 right for you?

Regardless of performance, there remains a question mark over the type of investors who should opt for a 60/40 portfolio. A rule of thumb often cited is to match your bond holdings with your age, so at 30 you hold 70/30 stocks and bonds, at 40 its 60/40 and by age 65 its 35/65, for example.

This may have had more validity when it was more likely that all your money would be called upon at retirement age, but increasingly people are keeping their money invested and living off the income or a mix of income and capital.

It is also important to consider the body of evidence that suggests stock markets normally outperform bonds over long periods. There is always new research emerging on the equities-bond debate. A provocatively named paper from academics at the University of Arizona - Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice - questions the validity of the 60/40 strategy. It ran scenarios that showed an even split of money between domestic and international equities built just over $1 million on average by retirement, compared with $760,000 for the 60/40 mix. So, if you want to grow a bigger pot, back equities, is their simple conclusion.

But this assumes that backing equities is easy, and it’s not. At times, it can be deeply uncomfortable as stock markets find reasons to lurch one way and then another. It means that an investor uncomfortable with the notion of losses make rash decisions; to sell, and often sell at the worst time.

There are other considerations. Some of the 60/40 funds available tend to have a more refined construction than my basic example, being more international and offering some exposure to company bonds alongside government bonds. Investors may also consider further diversification, such as an allocation to asset classes like real estate or private assets.

Every investment fund is different and every investor is different, with a different mindset and widely varying goals. The answer to the 60/40 suitability question needs to be bespoke and therefore it leads to the need for a financial adviser. You can find out more about getting a personal financial recommendation from one of Fidelity’s advisers here.

But if I were talking in generics, no investor should rule it out, based on age. If a younger investor is more inclined to stay invested because the ride is smoother, perhaps 60/40 is a solution.