The Decline and Rise of the Balanced Portfolio

The balanced portfolio, once considered dead in 2022, is making a comeback. Last year, both stocks and bonds experienced sharp price declines, impacting investors with a 60% stock and 40% bond allocation. The iShares Core Growth Allocation ETF (AOR), which follows this strategy, lost 15.6% in 2022. However, investors who held firm were rewarded as the stock market rebounded in 2023. AOR now boasts a total return of around 7.9% year to date. Although it falls short compared to the S&P 500’s gain of over 15% in 2023, it’s important to remember that the portfolio’s purpose is to provide diversification and mitigate stock price volatility.

The iShares Core Growth Allocation ETF (AOR) performance over the past 12 months

Some experts suggest that the 60/40 model may regain popularity, especially as higher interest rates increase bond income. Seema Shah, Chief Global Strategist of Principal Asset Management, believes that the drivers of rapid inflation increase in the last two years are unlikely to repeat. Furthermore, investors are now receiving higher compensation for taking interest rate risk due to higher interest rates. Over the past five decades, a 60/40 portfolio has historically delivered annual returns of 9.4%, compared to the S&P 500’s 10.9% return, with lower risk and volatility.

Adapting to a Changing Environment

Financial advisors used to lean towards a 70/30 or 80/20 allocation in favor of stocks to boost returns in balanced portfolios. However, in the current “higher for longer” interest rate environment, a 60/40 allocation allows investors to generate bond income without taking on additional equity risk. This is particularly important for retirees who need to keep up with inflation and be cautious about stock exposure. The concern now is reinvestment risk when the Federal Reserve begins lowering rates. To address this, advisors are including intermediate-term bond exposure with durations of four to six years. They are also exploring longer-dated certificates of deposit to secure higher yields for clients willing to lock up some of their cash.

U.S. six-month Treasury yield performance over the past 12 months

Is a 60/40 Portfolio Right for You?

While a 60/40 portfolio may not suit everyone’s circumstances or risk appetite, it provides a solid foundation for sound investments. According to Preston Cherry, CFP and founder of Concurrent Financial Planning, a balanced portfolio tends to yield positive results for long-term investors who avoid reactive behavior. The right asset allocation depends on individual goals and risk tolerance, which were tested during the market turmoil of the previous year. One thing is clear, though: 2023 rewarded those who stayed the course and resisted the urge to sell when prices were at their lowest. As Cherry advises, if you have a long-term perspective, it may be best to ride out the ups and downs of the market.