Mark Twain famously said, “The reports of my death are greatly exaggerated.” The same may be said for the 60/40 portfolio, the 60/40 mix of stocks and bonds rooted in diversification and pioneered by economist Harry Markowitz decades ago. In recent years, numerous financial pundits have declared that the 60/40 portfolio is dead. But is it really?

The year 2022 was indeed a disastrous year for the 60/40, as both stocks and bonds struggled in a brutal bear market. But then came 2023, and those 60/40s weren’t looking so bad, at least according to some folks.

In fact, Morningstar reported in early January 2024 that its 60/40 portfolio “combining a 60% weighting in the Morningstar US Market Index and a 40% weighting in the Morningstar US Core Bond Index chalked up returns of 18% in 2023.” So, is the 60/40 dead or alive and well? Or could investors benefit from a more modern approach?

That’s the question InsurMark Virtual CMO Jack Martin posed to our friends at The Index Standard—founder Laurence Black and managing director/head of analytics Dr. Jay Watson—during a recent episode of The Breakthrough Advisor Podcast. The Index Standard evaluates and rates indices, so advisors and their clients don’t have to.

Prior to launching The Index Standard, Black and Watson spent decades designing indices (including 15 years as colleagues at Barclay’s Investment Bank), so they know their stuff. Thus, they were the perfect guests to discuss the life, brief “death” and new approaches to the 60/40 portfolio as an investment strategy. Here are a few key takeaways from the gentlemen’s conversation.

Is the 60/40 portfolio dead?

As previously noted, the 60/40 portfolio was designed by Harry Markowitz. Markowitz was recognized with a Nobel Prize in 1990, as a pioneer in the theory of financial economics and corporate finance. Black believes Markowitz was truly on to something with his “simplistic portfolio,” especially when it comes to the importance of diversity in financial plans.

As he explains, “It’s actually a technology that’s been around, right? And I think it’s really been tried and tested. If you look at the last sort of 50 years, it’s never actually had a down year except for 2022. And that’s why we saw some of these headlines.

“If you look over the long term, this very simplistic portfolio has actually done very well. We actually went back, and it’s averaged around about 8%, right? So that’s a pretty good return. Now, why does this exist? I think this portfolio exists because we all need to be diverse and at least putting 60% into stocks, 40% into bonds keeps you somewhat diverse.”

Other than disastrous returns in 2022, why do people continue to diss 60/40 portfolios?

Dissing something that has been popular for decades, not to mention capable of yielding decent returns on average, is something that gets people’s attention. It’s good from a click bait perspective but the impatience of investors and desire for high returns drives people to seek other options, like putting all of their eggs in one basket.

“I think a lot of people are chasing performance. You know, we’ve seen fantastic performance with the Nasdaq and the S&P in 2023. So, people think, ‘I can just be concentrated.’ And, you know, Jack, I want to tell you a personal story. My father invested in one stock in 1986, leading up to ’87. I’ve seen what happens when concentration happens, and it’s not good.

“So, I think it’s still very relevant today because you’ve got to be diverse, but it [the 60/40 portfolio] is somewhat of a simplistic approach. And I think with some of these modern tools like alternatives, like annuities, you can really enhance it to get better returns,” Black says.

People can get in trouble chasing returns. Isn’t a 60/40 a safer option?

For Martin, whose career as an advisor spans three decades, the 60/40 was a highly effective tool for helping manage human behavior. After all, it’s natural for most people to want to chase performance.

Says Martin, “That’s why when you look at the fear-greed curve for the average investor, they’re buying high and selling low because they’re chasing performance. And if instead you’ve got this box that says, here’s where we’re going to allocate, you are naturally going to sell high out of positions to buy low into positions that are underperforming to get yourself rebalanced.”

In looking forward into 2024, Watson adds, “It makes a lot more sense than it did a couple of years ago. The main reason for the 60/40 is bonds and equities usually are de-correlated. Bonds go up when equities go down and vice versa. The bond part traditionally provides something of a cushion, so that’s important.

“The problem over the last few years has been the bond yields have been very low. And also, when bond yields got really low down at 2%, there wasn’t much room as for them to act as a cushion. Now, both of those things are changing. Now correlations are going down toward zero, maybe negative, which is good for equity bonds. And also, the expectation, the forecast returns from bonds are going back up again.”

Some pundits (Dave Ramsey, Suzy Orman) say we should expect 12% in returns on the asset side. Is that reasonable?

The number crunchers at The Index Standard rely on the “Wisdom of Wall Street” to create their forecasts. This involves tapping into about 35 different asset managers for their 10-year forecasts. What has their number crunching revealed? It isn’t 12%.

Says Black, “I know a lot of the investment banks try and forecast for the S&P one year ahead, and it’s a tough task. But when you’re looking out 10 years, you can take a bit more of a perspective on that. Assets might go up and down. It might be something called mean reversion. If they’re very high, they might come back, they might come back down to average, or if they’re low, they might go back up to the average.

“So that’s what we take a look at, and right now we are seeing much better returns. They’re all in the high single digits, but we’re not seeing these double digit returns that we’ve been treated to with the S&P and the NASDAQ 100. So right now, for the S&P on a total return basis, in 10 years, the average of our 35 firms is about 7%, which is not too bad. And then if you look at it on the fixed income side, we see that you can get around about 5% from the US Global Agg,”

When you combine the S&P at 7% (the 60% portion) with the Global Agg at 5% (the 40% portion), you’re looking at close to 6% return. Black suggests investors consider blending in other asset classes like EFA, emerging markets and/or value oriented options, which may push yields into the 8-9% area. (More deets on this in the podcast, so check it out.)

What role can FIAs and RILAs play in the 60/40 conversation moving forward?

For years many people have viewed fixed income as the anchor or the cushion but as 2022 showed us, that isn’t always the case. How can investors incorporate indexes into the mix, so they have some guaranteed income to work with?

According to Black, “You can certainly replace the fixed income with an FIA (fixed index annuity) in that 40% allocation, or you could even reduce your 60/40 and then add an FIA to the overall portfolio to add an anchor to begin to build some guaranteed income.”

Watson has been looking at how some of the risk/reward return scenarios can be improved and says, “We’ve looked at 60/40 portfolios using the Wisdom of Wall Street for what we think their forecasts are over the next 10 years. Then we’ve added some Model FIAs. And for me, an FIA is a hybrid. It has fixed income characteristics and equity characteristics. Now in a sense, you’re getting a little bit of the best of both worlds with them.

“You have the protection of your investment in the end. I emphasize in the end, because you’ve got to wait. It’s not protected tomorrow. It’s only protected at the end of the surrender period. You’re going to get it all back, and you’ve also got the possibility of equity upside.

“And so what we find is if you start with 60/40 and then instead of putting all of your money into 60/40, let’s say you put 80% of your money into 60/40 and the other 20% into an FIA. Broadly speaking, it quite markedly improves your risk versus reward trade off.”

That’s not all folks …

Martin, Black and Watson covered a whole lot more during the podcast, like the importance of taking into account crediting strategies, managing risk, getting more bang for your buck and a nifty tool called The Index Standard Ratio.® Listen to the complete podcast to learn more.

And if you’d like to learn how InsurMark’s advisor development organization can help you grow your practice, contact our office toll-free at (800) 752-0207 or connect with us online.

As an ADO – Advisor Development Organization™, InsurMark provides solutions to meet the ever-evolving needs of financial professionals with a mission to protect and enhance the financial security of every home in America.