For decades, the 60/40 portfolio allocation has been a template for balanced investing. The concept is fairly simple: 60% of your portfolio goes into stocks for growth, and 40% goes into fixed income (bonds) for income and stability. This mix of stocks and bonds has long been seen as an effective way to balance risk and reward.
America’s market environment recently caused the 60/40 portfolio to deliver one of its worst performances in decades.
This guide will explain the 60/40 portfolio, highlight the pros/cons, and discuss how ARQ Wealth customizes portfolios to fit your financial goals. If you’re looking for personalized investment advice, please call a wealth advisor at ARQ Wealth at (480) 214-9572 for a free consultation.
What is a 60/40 Portfolio?
The 60/40 asset allocation is a historically accepted “balance” of risk and potential return. This strategy involves dividing your portfolio among stocks and bonds:
- Stocks For Growth (60%): The stock market historically averages a 10% annual return, so this asset allocation exposes the portfolio to the potential for growth.
- Bonds For Stability (40%): Fixed income assets (bonds) historically offer lower returns than stocks, but generate consistent income and price stability. This helps offset the risk factors associated with the stock market.
The general theory is that stocks tend to grow quickly during periods of economic growth, enabling investors to reach their financial goals more quickly. However, when the stock market dips in value, as it did during the 2008 Great Financial Crisis, 2020, and 2022, the allocation in bonds will continue to offer stability and income.
The combination of these two asset classes creates a balanced way to achieve growth while balancing risk. For this reason, it has been viewed as a standard for creating resilient portfolios in investment management.
Benefits of a 60/40 Allocation
The 60/40 allocation is often recommended by financial advisors to moderate-risk investors. Here’s why:
- Diversification Benefits: The two asset classes should deliver growth while also providing stability and income to manage risk and protect capital.
- Simplicity: The allocation is easy to understand and fairly simple to implement through buying exchange-traded funds (ETFs), index funds, and mutual funds.
- Creates Guardrails: The allocation in two different asset classes helps prevent an overconcentration in stocks during bull markets, which protects the investor if the market drops.
- Historical Performance: This allocation has performed strongly over the past few decades, helping it emerge as a standard for many investors and advisors.
Drawbacks of a 60/40 Allocation
That said, the 60/40 allocation is not without downsides. Let’s explore why some investors might stay away from this allocation:
- Limited Returns: Stocks tend to outperform bonds over the long term, meaning that this portfolio allocation is likely to underperform an all-stock portfolio, especially during a bull stock market.
- Overconcentration in Two Assets: This portfolio utilizes only two asset classes, excluding assets such as real estate or alternative investments.
- Interest Rate Risk: Bond prices typically drop when interest rates rise, which can hurt the investor’s returns. If interest rates rise while the stock market is dropping, both stocks and bonds might suffer simultaneously.
Interest rate risk became especially troubling in 2022, when interest rates rose rapidly while the stock market declined. Let’s explore that in a bit more detail.
Why 60/40 Might Not Be Enough
Rising Correlation Between Stocks and Bonds
One of the foundational assumptions in a 60/40 portfolio is that stock and bond returns will often work inversely. If stock prices decline, bonds should rise or at least remain stable. This helps create a counterbalance that protects the investor. But in recent years, that relationship has eroded.
Stocks and bonds have started to show a closer correlation in recent years, meaning both can decline in price together. This occurred in 2022 when the 60/40 portfolio delivered one of its worst performances in decades. While past performance is not a guarantee of future results, investors are questioning whether the 60/40 allocation is truly diversified.
A Static Allocation in Dynamic Markets
Today’s economy moves quickly. Markets can rise and fall based on a tweet, and the global geopolitical environment is in a constant state of flux. Even the Federal Reserve, traditionally an anchor for the economy, has started to adjust its interest rate policy with surprising speed.
Given all of this, modern investors need to adjust their portfolios more quickly, rather than consistently rebalancing to a 60/40 allocation.
Not Personalized
The 60/40 allocation provides a great starting point for investors. But there’s one problem: Not all investors are the same.
A fixed 60/40 strategy largely overlooks critical factors, such as the investor’s age, time horizon, income volatility, risk preferences, goals, and withdrawal needs. It also relies entirely on stocks and bonds, while ignoring other asset classes like alternative investments or real estate.
So if a 60/40 allocation isn’t enough, what should you do?
Ultimately, that answer will depend on your financial goals and current financial situation. Investing involves risk, which is why it’s so important to schedule a call with a financial advisor who can create a personalized investment portfolio.
That said, there are a few steps ARQ Wealth is taking to help our clients.
How ARQ Wealth’s Investment Strategy is Different
At ARQ Wealth, our investment strategy is tailored to your specific financial goals and situation, rather than a generic approach.
A Team-Based Approach to Management
ARQ Wealth provides a team of financial experts, all with different specialties, to analyze your unique situation and create a long-term plan to meet your financial goals.
Our team consists of credentialed professionals, including six CFPs®, one RICP®, three AIFs®, and two CFAs. Together, we’ve created more than 3,000 financial plans, and our collaboration enables us to create tailored plans that are more personalized than a generic approach, such as the 60/40 portfolio.
Low Client-to-Advisor Ratios
Today’s economy moves quickly, and advisors who manage 200 clients at a time can’t realistically expect to adapt investment strategies quickly for each client based on market movements and changing economic environments.
This is why we limit the number of clients our financial advisors manage, so each one receives the attention their financial future deserves.
A Fee-Only Firm
When it comes to reaching your financial goals, every dollar matters. That’s why we charge a transparent fee for each client. Our team doesn’t receive a commission to sell you products and doesn’t take a larger percentage of your assets as your net worth increases.
Comprehensive Wealth Management From ARQ Wealth
For decades, the 60/40 portfolio was the gold standard for diversification. But today’s economy looks much different. Rising interest rates, faster economic cycles, and closer stock-bond correlations have challenged the 60/40 portfolio’s reliability as a truly diversified investment approach.
At ARQ Wealth Advisors, we believe investors deserve a more adaptive, personalized strategy that reflects their investment objectives, timelines, and risk tolerance. In some cases, this means implementing tax planning or alternative investment strategies.
Our credentialed team collaborates to design portfolios that go beyond just two asset classes, combining strategic diversification with proactive management to help you stay confident
through every market cycle.
If you’re wondering whether your current portfolio diversification is still serving you, now is the perfect time to find out. Schedule a free consultation today to discover how a customized plan can help you achieve your long-term financial goals.