Why the 60/40 Portfolio Needs to Change

Why the 60/40 Portfolio Needs to Change

For many years it’s been common among stockbrokers and financial planners to set up a portfolio for clients composed of a simple two-investment ratio. Also known as the 60/40, it was easy, simple, and straightforward. But such simplicity is long gone.

The 60% equities/stocks with 40% bonds (or 60/40) were the gold standard of a balanced portfolio during the 80s and 90s. However, many things have occurred since 2000 that contributed to a dwindling trust in stocks and bonds. So, there must be a change.

Being able to withstand financial turbulence is the name of the game. Today, experts claim that a broader approach is best with a well-diversified portfolio that includes other assets in addition to stocks and bonds.

The 60/40 portfolio over the last 40 years

The last 40 years have seen a long-term bull market in stocks and bonds, which made the concept of a 60/40 portfolio ideal. This is because stocks were once a mirror for future economic growth.

How it used to be

Seeing as how the stock market is constantly in flux, bonds offered protection from severe dips. The large price appreciation of bonds would more than compensate for consistently lower coupon rates.

Bond yields rose while prices fell with increased inflation, making bonds less volatile since prices moved opposite to stocks.

This would smooth out returns by providing a hedge against stock market volatility during times of distress.


Bonds provided protection

This usually meant that bonds provided a barrier against stock market volatility. It’s generally during such times that interest rates lowered but had support from higher bond prices.

This philosophy also applies to the concept of 401(k) plans, shifting the portfolio to the bonds side of the portfolio as an investor matures.

But such a setup was possible under normal, healthy economic circumstances. Since 2000, a series of bear markets hit the scene with low-interest rates that fell from the mid-teens to almost zero. This eroded the staying power of the 60/40 mix.

Today’s market: the 60/40 split

While this was once a mainstay for investing, the 60/40 portfolio is not sustainable in today’s market. This is even more poignant since the onset of SARS-COV-2 and the decisions borne out of hysteria.

Many savvy finance pros suggest that this kind of portfolio will grow at a rate of only about 2.2% annually.

Other experts postulate that such a mix is just as risky of an investment as a portfolio entirely composed of stocks. The proof of this goes as far back as 1926.

The endowment fund of Yale University is a perfect reflection of how traditional investments must change to stay viable. The fund allocates 89% of its portfolio to several other assets while only having 5% in stocks and 6% in bonds.

Reasons why the 60/40 portfolio underperforms

The reason why a 60/40 portfolio underperforms is primarily due to the monetary policies set forth by Congress and the Federal Reserve, along with the practices of Wall Street and private banks. But there are other contributors to poor performance too.

Since the reaction to SARS-COV-2, the market has been volatile. Commodities investments into things like timber or cereal are high risk. Things are so unstable that even having a basic savings account is insolvent.

60/40 portfolio

The federal government

This comes in no small part from the federal government creating mandates that will result in a scorched-earth policy. This does and will leave, much to desire.

But this was already on a downward spiral long before anyone heard of SARS-COV-2. Bond yields were low and did not provide much of a return. Yet stocks kept rising. Wall Street, in a predictable fashion, took on more risk as the solution.

Federal reserve’s role

The Federal Reserve contributed to the problem with several policies helping to sacrifice the earning potential of a 60/40 split. The use of quantitative easing and the lowering of interest rates are just two examples in a pre-COVID world.

Private Banks didn’t help the issue before the lock downs either. Instead of acknowledging the increased price in safety, some banks invested in riskier assets.

The idea was that things like real estate or high yield corporate bonds were safer to juice returns. Doing this ended up being a bad idea; it only increased their portfolio’s volatility.

Other contributors to the poor performance of a 60/40 come from high equity valuations, increased risks in bond funds, and low commodity prices. Plus, digital tech has impacted potential growth, other vital industries, and innumerable micro-economies.  SARS-COV-2 measures compounded this destructive storm.

Future outlook on portfolio investments

The prospects are dim, lacking potential for possible growth. This domino effect came upon the announcement made in March of 2020 by James Bullard, President of the Federal Reserve in St. Louis.

At the beginning of the lockdowns, he iterated to Bloomberg that this was a planned partial shutdown of the 2nd quarter.


The resulting CARES Act allowed the melding of the US Treasury with the Federal Reserve. This is the nail in the coffin for the 60/40 portfolio. The exorbitant pork-barrel spending through the acts passed after and in combination with CARES paints a dismal future for investing.

So, it now stands that almost any investment is high risk. All hedging strategies are no longer a sensible option because policies like the CARES Act fundamentally changed America’s stock-and-bonds relationship. Inflation means tanking bond prices while yields rise. If this doesn’t change within a few years, bond prices could become even more volatile, which means less protection against stock risks.


What’s more, this melding of the Federal Reserve with the Treasury engages in Special Purpose Vehicles (SPVs) that can cause the market to fluctuate on a whim. These SPVs can be secret and are exempt from Freedom of Information Act (FOIA) requests.

This means the federal government can spend any amount it wants, give it to whomever they choose, and they don’t have to be transparent about it. Yet taxpayers and investors will be responsible for flipping the bill.

Reasons to diversify regardless of the market

Therefore, investing in multiple assets is the way of securing growth for the foreseeable future. Whether times are good or rough, having alternative investments will increase the chances of your funds surviving.

A portfolio with broader inclusions has a long history of being far less volatile, showing it would yield the same returns over time. This is the best protection against inflation and any other snafus policymakers may pull.

Consider the list below to devise inclusions for an investment portfolio:

  • Commodities
  • Hedge Funds
  • Private Equity
  • Exchange-Traded Funds
  • Venture Capital
  • Mutual Funds
  • Inflation-Safe Assets (i.e., precious metals and collectibles)
  • Personal Investments (i.e., real estate or business startups
Tips for stock trading

Weighing choices

While some experts recommend using stock options, others say riskier high-yield debt offers the best insurance. But both come with problems.

Stock options may not be accurate, and higher-yield assets aren’t a guarantee. Either way means taking on more risk, and this may not be practical for less sophisticated investors.


Cryptocurrency seems like a good idea, but there are issues with this as well. While it may be good to try it as part of an overall portfolio, investing a severe amount is not wise. It’s not a tangible store of value and operates entirely by digital means. This gives it instability inherent to its nature. Also, many countries are developing legislation to make it illegal tender.

Precious metals

The most reliable investment is in precious metals. Things like gold, silver, and palladium are solid, tangible and protect everything from investments to loans. This has been a trusty store of value since ancient times and offers the best security against inflation.


The average investor must change from a 60/40 split portfolio to a broader one, encompassing more than stocks and bonds. There was a time when having such an essential mix was perfect, ideal, and straightforward. But recent decades have shown an increasing downturn in the security of having it.

Regardless of the bleak outlook ahead, there is some potential to invest in certain things, such as precious metals. These could prove to be a lifesaver. But it does mean taking the risk and hoping for the best.

Image by Sergei Tomakov