The balanced portfolio – reported by many to have died in 2022 – is experiencing a revival. Last year saw simultaneous sharp price declines for equities and fixed income, and investors holding a portfolio that’s allocated 60% to stocks and 40% bonds weren’t spared. The iShares Core Growth Allocation ETF (AOR) that mimics the strategy lost 15.6% in 2022, including reinvested dividends. Investors sitting tight were rewarded, however, as 2023’s run-up in stocks helped lift the 60/40 model. Indeed, AOR now has a total return of about 7.9% year to date. It still comes up short against the S & P 500 ‘s gain of more than 15% in 2023 – but bear in mind that the portfolio’s job is to offer diversification and blunt the price volatility of stocks. AOR 1Y line The iShares Core Growth Allocation ETF (AOR) over the past 12 months And some say the 60/40 model may be coming back into vogue, particularly as higher interest rates boost income from bonds. “Looking ahead, the drivers of inflation’s rapid increase over the last two years are unlikely to repeat,” said Seema Shah, chief global strategist of Principal Asset Management. “And thanks to higher interest rates, investors are getting much higher compensation for taking interest rate risk compared to 2021-2022.” She noted that over the past five decades, the diversification benefit of a 60/40 portfolio has helped it deliver annual returns of 9.4%, compared to the S & P 500’s 10.9% return – and has done so with far less risk and volatility. A changing environment In the past, financial advisors hoping to bolster returns in balanced portfolios may have skewed the allocation a little more closely to 70/30 or even 80/20 in favor of stocks, said Ryan Salah, a certified financial planner and partner at Capital Financial Partners. But now, a “higher for longer” interest rate environment means 60/40 investors can generate income from their bond sleeve without having to take additional equity risk – especially important for retirees who still need to keep up with inflation and be mindful of stock exposure. The concern now – especially with short-term Treasurys yielding more than 5% and the Crane 100 Money Fund Index posting an annualized 7-day current yield of 5.14% – is that investors are facing reinvestment risk once the Federal Reserve begins dropping rates, Salah said. US6M 1Y line U.S. six-month Treasury yield over past 12 months “Everyone is chasing this shiny object of 5% yields in money market funds, and it will change when rates go down,” he said. “It’s very important to make sure you have short term-, intermediate- and a sliver of longer maturity debt.” To counter this risk, the advisor is adding some intermediate-term bond exposure, with duration of four to six years. Duration is a measurement of a bond’s price sensitivity to changing rates, and issues with longer maturities have greater duration. “We saw long-term bonds get hit hard when rates were rising, but they could get good price appreciation when yields fall,” Salah said. He has also been shopping for longer-dated certificates of deposit, going out as far as two years, for clients who don’t mind locking up some of their cash in exchange for higher yields. Is it still right for you? A 60/40 portfolio isn’t right for all investors and their situations, but it does create a solid foundation for sound investments, said Preston Cherry, CFP and founder of Concurrent Financial Planning. “Over time, a balanced portfolio will generally bode well for long-term investors, and the habit of not conforming to reactive behavior will tend to yield positive results,” said Cherry, who is also a member of the CNBC Financial Advisor Council. Whether you’re in the right asset allocation will depend on your goals and your risk appetite – which were put to the test in last year’s tumult. One thing that is clear, however, is that 2023 rewarded investors who were able to withstand the previous year’s volatility and resist the urge to bail when prices were at their lowest. “If you’re in for the long term, you may want to ride it out,” said Cherry.
