Rethinking the 60/40 Portfolio: Is it Still a Viable Option in 2023?

Rethinking the 60/40 Portfolio: Is it Still a Viable Option in 2023?

Louis J. Butera, CFP® | May 18, 2023

The 60/40 portfolio has been a tried-and-true investment strategy for decades, but with the constantly evolving market and economic landscape, many investors are left wondering if it still holds up in 2023. As we enter a new era of financial planning, it’s essential to review investment strategies, even if they have been applicable in the past, to evaluate their relevance in our current economic environment. Let’s take a closer look at this traditional approach and see if it’s still a viable option for building a successful investment portfolio in 2023.

The Typical 60/40 Portfolio

The 60/40 portfolio is a traditional investment strategy that utilizes an asset allocation of 60% equities for capital appreciation and 40% fixed income for yield and risk mitigation. The logic behind this strategy is that when stock returns decline, the bond yields will increase to stabilize the portfolio and keep the overall return steady. While this allocation has historically delivered a positive annualized return, last year was one for the record books. The 60/40 portfolio saw its worst performance since 1937 as both equities and fixed income investments plunged by double digits. Despite the poor performance, there are still several advantages to this investment strategy.

Advantages

The 60/40 portfolio has long been used as a retirement investing strategy due to its ability to produce both growth and long-term income. Benefits of this strategy include:

• Lower volatility: Traditionally, the 60/40 portfolio has provided reduced volatility since it is considered a balanced portfolio. The stability of the fixed-income investments generally counterbalances the risk associated with equities.
• Easy to set up & maintain: A 60/40 portfolio can be relatively easy to set up, especially when using ETFs and index funds. All you need is annual rebalancing to maintain the target asset allocation, making it an appealing strategy for those who want to keep their portfolio simple.

Disadvantages

Despite its historical performance, past results do not predict future returns and the 60/40 portfolio does have a few flaws.

• Reduced diversification: The fatal flaw in this strategy happens when stocks and bonds are highly correlated, as they were in 2022. This can cause the stocks and bonds to decline together instead of moving in opposite directions, thus reducing traditional diversification benefits. This can be a huge challenge for all portfolios, but it’s particularly risky with the 60/40 since the allocation between stocks and bonds is nearly equal.
• Lower returns: While a 60/40 portfolio has historically provided stability and reduced risk, it typically generates lower returns than an all-equity portfolio. The larger allocation to income-producing assets like bonds means less of your portfolio is invested for growth.
• Inflation risk: Inflation is a serious threat to the 60/40 portfolio. Not only does it eat away at returns from growth-oriented assets like stocks, but it also erodes the value of the bond portion of the portfolio over time. With extended periods of high inflation, the 60/40 portfolio can experience a significant loss in purchasing power.

Economic Considerations for 2023

Despite what we saw in 2022, there are several reasons to suggest the 60/40 portfolio may make a comeback in 2023. First, there is historical evidence to show that the 60/40 portfolio often rebounds with strong positive returns in the years after a downturn. 

Not only that but inflation has decreased steadily over the last three months, down to just 5% in March 2023. As one of the biggest risks to the 60/40 portfolio, declining inflation is a huge relief that could improve the outlook for this strategy going forward. 

Lastly, with the Fed expected to slow its interest rate hikes, there could be less pressure on bonds in the coming months and a more normalized correlation between the equities and fixed income sides of the 60/40 portfolio. With a lower correlation between stocks and bonds, the traditional diversification benefits of a 60/40 portfolio could be restored.

Don’t Go at It Alone

Reexamining your investments from time to time is always a wise decision, especially when the economy goes through its ups and downs. The good news is that you don’t have to figure it all out on your own. Our team is eager to collaborate with you to help you understand the best options and develop a plan for your success.

Whether you have questions regarding the 60/40 portfolio or wish to discuss your specific financial circumstances, Butera Wealth Management is here to serve you. Our goal is to create a financial strategy based on trust and reliable sources of information. Don’t allow the changes in the market to cause fear and confusion about your financial future. We invite you to schedule a free, no-obligation phone call by contacting us at 484-455-2661 or louis@buterawm.com to learn how our 2nd Opinion Service can make a difference in your financial life. 

About Louis

Louis Butera is the founder and president of Butera Wealth Management, LLC, an independent wealth management firm operating out of Newton Square, Pennsylvania. With over 30 years of experience in the financial services industry, Louis specializes in serving pre-retirees who hold management or executive roles, particularly in the pharmaceutical industry. In 2015, he started his own firm with the express goal and vision of fostering meaningful relationships with clients to help them pursue financial independence and prepare for retirement. Louis and the Butera team provide a customized process to help their clients plan for every aspect of their financial life. Trust has always been key for Louis, and with this foundation, he has helped guide his clients through many different market cycles and life milestones. 

Louis is a CERTIFIED FINANCIAL PLANNER™ professional and has a bachelor’s degree in business management from Ithaca College. When he’s not working with his clients, Louis enjoys being outside, playing golf, skiing, and leading an active life with his wife, Michelle. They are both great supporters of local charities and their community. To learn more about Louis, connect with him on LinkedIn.

Disclaimer

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Asset allocation does not ensure a profit or protect against a loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This material was prepared for Louis Butera’s use.