The New 60/40

Summary

• A 60/40 mix between stocks and bonds has historically been a rule of thumb for investors wishing to mute some of the volatility of equities.
• With lower forward expected returns on equities and fixed income, will the 60/40 portfolio return continue to deliver for investors?
• This article compares the 60/40 heuristic versus low volatility equities, which also offer lowered equity volatility akin to a bond allocation.
• I also examine the performance of an 80/20 strategy that features low volatility equities in lieu of a more traditional stock allocation.
• Results of the different strategies are compared over the nearly three decades of data available for my chosen low volatility equity index.

Historically, a portfolio mix of 60% stocks and 40% bonds has been a formula for long-term investing success. This heuristic was commonly used by pension funds to capture a portion of the upside of equity markets while the bond component cushioned returns in weak market environments. As equity market rallied and lower interest rates buoyed bond returns in 2019, 60/40 produced tremendous performance. However, the traditional 60/40 portfolio still underperformed a strategy that I have previously discussed on this platform.

Graphed below is the annual performance of a 60/40 combination of the S&P 500 (SPY) and the Bloomberg Barclays U.S. Aggregate Index (AGG). I have graphed the annual return of a 60/40 portfolio back to the earliest available returns available for the bond component of that portfolio. Last year was the best performance for the 60/40 mix since 1997.

On this blog, I have espoused a tilt towards low volatility equities, and a lower allocation to the fixed income portion of the 60/40 portfolio. To dig into a comparison with the balanced 60/40 portfolio, I used the S&P 500 and the Bloomberg Barclays U.S. Aggregate Index as my representations of equity and fixed income respectively. For Low Volatility stocks, I used the S&P 500 Low Volatility Index, which tracks the performance of the one-hundred lowest volatility constituents of the broader S&P 500.

The table below lists performance figures for the equity index (SPX), the bond index, the 60/40 portfolio of stocks and bonds, low volatility stocks (LV), and an 80/20 portfolio of low volatility stocks and bonds over this long study period. Annual return data dates to 1991, the longest available period of annual returns for my chosen Low Volatility Index.

Even with stocks near all-time highs, the 60/40 portfolio (rebalanced annually in this example) has trailed the standalone S&P 500 by just

Analyst’s Disclosure:I am/we are long SPLV, SPY, XSLV, XMLV, EFAV, EEMV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.