After a Disastrous 2022, the 60-40 Investment Strategy Is Coming Back
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Here's your money briefing for Wednesday, April 19th. I'm J.R. Whelan for The Wall Street Journal. One investing strategy that's been consistent among financial advisors for decades is 60-40, a blend of 60% stocks and 40% bonds. That is, until last year.
The market faced a lot of challenges. Stocks suffered. Bonds were also down. Oil prices were all over the place. And 60-40 strategy was just one of the many things that didn't exactly work last year.
We'll talk to WSJ Markets reporter Hardika Singh after the break.
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Financial advisors have long recommended a 60-40 approach to investing, 60% in stocks and 40% in bonds. But sharp market declines last year pushed that strategy out the window.
What is the 60-40 investment strategy and why has it been popular for decades?
Now in 2023, it's back on the table for investors to consider. Wall Street Journal markets reporter Hardika Singh joins us to explain why. So Hardika, with the exception of last year, why has the 60-40 strategy worked so well for investors?
Investors have relied on the 60-40 strategy for decades. Financial advisors across the country tell Americans planning for retirement that it is mostly a surefire way to get steady cash flow from 1988 to 2022, 35 years. The strategy has earned an average of 9.3% annually. That's a lot.
All right. And so why did that strategy not work in 2022?
The market faced a lot of challenges last year. Very few things worked. Stocks suffered. Bonds were also down. Oil prices were all over the place. And 60-40 strategy was just one of the many things that didn't exactly work last year. It fell because the Federal Reserve was aggressively raising interest rates, and that brought down bonds at the same time as stocks. Those simultaneous, or you can say tandem losses, were really hurtful to the strategy, which depends on 60% of its allocation made in stocks and the other 40% made in bonds. To further put that into numbers, last year, the S&P 500, which is 500 stocks in the U.S., it finished down about 15%, and that includes dividends. And then in addition to that, bonds, which were supposed to sort of help your portfolio hold up in value a little bit better, they suffered their worst bear market in decades.
All right. So let's focus on 2023. What is it about the market this year that makes the 60-40 strategy attractive again?
It's all about the Fed. Investors are betting now on the Federal Reserve pivoting from their aggressive interest rate campaign and paring back some of their hikes, essentially. And the recent banking crisis has supercharged those bets because people now think we're going to have a recession with tighter lending standards coming into place. A portfolio with 60% of its money invested in U.S. stocks and 40% in the Bloomberg U.S. Aggregate Bond Index has gained 5.9% this year.
But is this a sure thing in 2023? It seems like the Fed is always full of surprises and kind of catches the market by surprise. Plus, we keep hearing that stocks are expensive and might have room to come down.
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