The 60/40 Portfolio Isn't Dead, Just More Expensive: Allison Schrager

Volatile, pandemic-riven markets for stocks and bonds has Wall Street ready — again — to declare the traditional 60/40 portfolio split a dead strategy. The prospect of a low-growth, high-inflation economy (stagflation) dims the prospects of both investment categories, and certainly demands a rethink of where to stash your savings.

The big banks already are offering advice on alternatives; I’ve got some of my own. But for investors seeking robust-but-safe returns, there’s really just one option: be prepared to take on more risk.

The 60/40 ratio — 60% stock and 40% bonds — has become the go-to portfolio for typical retail investors, providing growth from stocks and stability from bonds. Even a well-diversified collection of stocks can be risky and unpredictable, so bonds protect investors in two ways: they’re less volatile and, in normal times, their prices move in the opposite direction of stocks, smoothing out returns. A similar philosophy is behind target-date funds that are offered in many 401(k) plans, which move the portfolio more into bonds as the investor ages.

Stocks generally reflect the growth prospects of the economy, and bond yields rise (and prices fall) when inflation goes up. Therein lies the problem: when the economy slows while inflation rises, stocks may fall at the same time bond prices do, nullifying the purpose of a 60/40 split.

Even before the pandemic, the financial industry was rethinking 60/40. Bond yields were very low and not offering much return, while stocks kept going up. In typical Wall Street fashion, the solution was to take on more risk. Some banks suggested putting riskier assets like high yield corporate bonds or real estate in the safer 40% part of the portfolio to juice returns. But that just reduced the stability of the portfolio. It would have been simpler to acknowledge that the price of safety had gone up, so accepting more risk, such as with a 70/30 stock-bond split, might be necessary for investors to achieve their desired returns.