Has the 60/40 portfolio lost its mojo?

Ever since the start of the huge bull market in the 1980s and 1990s, the 60/40 portfolio was a great way to reduce the volatility in one’s portfolio. The bond portion of the portfolio would spit out 6 to 8 percent yields and, just as importantly, the bonds would tend to rally and yields would drop during market corrections as investors would jump into the safety of bonds during the times of perceived increased risk. Portfolios with bonds that were periodically re-balanced performed very well and had relatively low levels of risk compared to all stock portfolios. It was relatively easy to manage money using this conventional strategy.

However, like the saying goes, all good things must come to an end. On Oct. 10, when stocks were free-falling, bonds didn’t rally. The expected negative correlation between stocks and bonds failed to materialize. Over the past year, the traditional relationship between the two asset classes has deteriorated.

Unlike the late 1980’s and 1990’s when interest rates were generally falling, the last time bonds and stocks moved together for long periods of time was during the inflationary period of the late 1960’s and 1970’s – a notoriously bad period for stocks.

Is it time to rethink the concept of the 60/40 portfolio? If bonds aren’t going up when interest rates rise, they aren’t going up when stocks fall and their yields are relatively modest, should we still own them? Through the first three quarters of 2018, the S&P 500 was up more than 10 percent, whereas the Morningstar 60/40 benchmark was up just more than 3 percent as a result of the fact that bonds have lost value in 2018.

If bonds are no longer the safe asset that can be used to reduce risk in portfolios, investors both big and small will likely need to use other types of non-correlated conservative assets to reduce risk.

*Barrons