The 60/40 Portfolio is a highly recommended investing strategy that allocates 60% of the portfolio to large-cap equities and 40% to bonds like treasuries or investment-grade corporate bonds. This balanced portfolio strategy is meant to have moderate risks and returns by taking advantage of the best of both worlds: the higher growth potential of stocks and the capital protection of bonds.
Typically, bonds are seen as safer assets than growth assets like stocks. Hence, they are used as diversifiers in times of slowing economic growth or recession, as stocks would see a sell-off and bond prices would appreciate as investors sought stability. This limits the portfolio’s drawdown in times of huge volatility.
The validity of this strategy was put to the test in 2022. A 60/40 Stock and Bond Portfolio dropped by around 17%. Both the stock and bond asset classes declined sharply as a result of the Federal Reserve raising interest rates at an unprecedentedly rapid pace in order to combat 40-year-high inflation.
Though investors may ponder the effectiveness of such a strategy, it’s best to remind ourselves not to place too much weight on a single year’s performance, especially when investing for the long term. With that in mind, I decided to deep dive into the performance of a 60/40 Portfolio and the importance of having a mix of stocks and bonds in our portfolio.
Read Also: Are Bonds A Good Investment During A Recession?
How Would A 60/40 Portfolio Strategy Perform Over The Last 20 Years
I compared the returns of three portfolios to determine the effectiveness of a 60/40 Portfolio strategy: 1) a 100% stock Portfolio, 2) a 100% bond Portfolio, and 3) a 60/40 stock and bond Portfolio.
For the stock representation, I used the US benchmark index, the S&P 500, and the US 10-Year Treasuries for the bond representation.
I also looked at the performance across three time intervals: 1-Year (short-term), 10-Year (mid-term), and 20-Year (long-term) periods.
1-Year Performance (2022)
Looking at the past year’s performance from the start to the end of 2022, all three portfolios were down double digits. Unsurprisingly, the portfolio with a 100% US stock allocation fared the worst.
It is also worth noting that the maximum drawdown, which is an indicator of the downside risk over a specified period, was above 20% for both the 60/40 and the 100% US stock portfolios. On the other hand, the 100% bond Portfolio was down the least, at around 17%.
| Portfolio | Initial Balance | Final Balance | CAGR | Max Drawdown |
| 100% US Stocks | $10,000 | $8,040 | -19.60% | -24.94% |
| 100% US Treasury Bonds | $10,000 | $8,481 | -15.19% | -16.91% |
| 60/40 Portfolio | $10,000 | $8,216 | -17.84% | -21.24% |
Source: www.portfoliovisualizer.com
Looking at these returns, we can start to understand why some investors may feel that bonds are no longer effective in reducing portfolio volatility and downside risk. But is that really true?
10-Year Performance (2012–2022)
If we take our backtest further by looking back at a 10-year performance from 2012 to 2022, the returns from a 60/40 Portfolio are around 8% a year, while a 100% US stock portfolio generated higher returns of around 12% a year. Comparatively, an all-bond portfolio generated a CAGR of only 0.61%.
| Portfolio | Initial Balance | Final Balance | CAGR | Max Drawdown |
| 60/40 | $10,000 | $22,986 | 7.86% | -21.24% |
| 100% US Stocks | $10,000 | $35,971 | 12.34% | -24.94% |
| 100% US Treasury Bonds | $10,000 | $10,694 | 0.61% | -21.22 |
Source: www.portfoliovisualizer.com
During the 10-year period, the US stock market was only down more than 20% once, in 2020, which came as a result of the unprecedented global Covid-19 lockdown measures. Yet, the maximum drawdowns for the 60/40 and 100% US stock Portfolios are the same as what was recorded last year, or 2022. This could indicate that the performance in 2022 was an outlier, where both asset classes were affected in equal measure.
22-Year Performance (2000–2022)
Finally, looking back over the last 22 years, we see a CAGR of 6% for both the 60/40 Portfolio and the 100% stock Portfolio, though the maximum drawdown is significantly different this time. The max drawdown for the 60/40 Portfolio is around half, or 26%, of the 100% stock-allocated Portfolio’s 51%.
| Portfolio | Initial Balance | Final Balance | CAGR | Max Drawdown |
| 60/40 | $10,000 | $39,402 | 6.14% | -26.40% |
| 100% US Stocks | $10,000 | $41,388 | 6.37% | -50.89% |
| 100% US Treasury Bonds | $10,000 | $25,218 | 4.10% | -21.22% |
Source: www.portfoliovisualizer.com
Here, we can easily observe the role that bonds play in one’s portfolio. While the CAGR of a 60/40 Portfolio is similar to that of a 100% stock Portfolio at 6%, the downside risk is only half that of an all stock portfolio. Furthermore, it is not much higher than the 100% bond Portfolio, despite delivering better returns.
Choosing The Right Bonds Could Improve A 60/40 Portfolio Performance
To create a 60/40 Portfolio, we can select from a wide selection of equity indices, whether local or international. However, when it comes to bonds, local investors could also choose to mix their portfolio with more than just bond ETFs or funds. Investors can choose to directly invest in high-quality investment-grade individual bonds that yield higher than what can typically be achieved from US Treasury securities or other bond ETFs.
This is a plus because, as investors in Singapore, we are subjected to the withholding tax on dividends received from US companies. By being able to invest in individual bonds that are denominated in SGD, we can get the same or higher bond yields than an international bond fund but without the currency risk and tax implications.
As investors, we want to lower our risks and cut down on the costs of trading so that we can make more money.
Read Also: Beginner’s Guide To The Different Types Of Bond Investments In Singapore
Use Bondsupermart To Search And Build Your Bond Portfolio
In the past, corporate bonds were only available on an over-the-counter basis. This made it difficult for retail investors to gain access without an intermediary. With Bondsupermart’s platform, retail investors can easily get information on a wide selection of bonds, including those issued by blue-chip companies and government bodies.
For example, in the screenshot below, I have filtered my search results for corporate bonds that issue a 4-6% coupon rate with a maturity period of between 3 and 5 years. I can further arrange my search results based on the bond credit rating to ensure that I’m looking at the highest rated bonds first. The results also show the asking price of the bonds, which could be below par value, which might give us an additional return in addition to the coupon rate upon maturity.
Source: Bondsupermart (Screenshot taken as of 11 January 2023)
Having access to the free-to-use platform of Bondsupermart not only allows me to stay updated on the performance of my current bond holdings, but it also enables me to search for higher-yielding bond securities to further enhance my returns. The platform works like a stock exchange, but for bonds. Investors can get up-to-date bond pricing information and look for undervalued gems when the market is more volatile.
If you have not done so, check out Bondsupermart today and grow your bond portfolio.
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