The 60-40 Portfolio Shake-Up: Adapting to a Changing Investment Landscape

2022 was the worst performing year for the 60-40 investing strategy since 1937.

Even though this may be cause for concern, it is crucial to not abandon a financial strategy after one down year, especially when that strategy holds as strong of a historical trend as the 60-40 rule has.

Today’s episode of Retire in Texas breaks down exactly what the downward market trends from last year mean to investors, and what you should be on the lookout for going forward.

Some of the topics discussed include: 

  • The breakdown of a 60-40 investing portfolio.
  • Some of the challenges facing the 60-40 strategy.
  • Why it is so important to not abandon a strategy based on one bad year.
  • Potential reasons for minor modifications to the 60-40 strategy.

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Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group, and you’re listening to Retire in Texas. Thanks for tuning in. And as always, I want to remind you this information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. And I probably haven’t told you in a while, So I want to remind you that we’ve got some e-books on our website.

So go to the website if you want to digest some of the content that I provide. We often produce eBooks that are just really quick reads that you can educate yourself on certain spaces. A lot of people like our Biblical Responsible Investing e-book, so you can check that one out. We also have a good one for business owners on retirement planning for business owners.

So, if you want to find some of those e-books, go to PAXFinancialGroup.com. Cool. So, I wanted to discuss the Wall Street Journal article. You know, I know a lot of us don’t subscribe to Wall Street, so I typically try to read it daily and it’s just got some of the really best content and yes, there’s some bias in there but really the latest and greatest content.

So, this is actually an article from October 19th, 2023. It’s relatively new. Eric Wallerstein is the writer of this article. So, here’s the title: “The Trusted 60-40 Investing Strategy Just had its Worst Year in Generations”. The Trusted 60-40 Investing Strategy Just had its Worst Year in Generation. So, what’s 60-40? A 60-40 strategy is when you have your investments, you give it to a financial advisor, or you do it yourself.

It doesn’t matter. But a lot of people and a lot of research supports this. So, it’s just not like haphazardly suggest as you get closer to retirement or closer to pivoting or even when you are retired, your portfolio construction, the way the recipe is built should have 60% stocks and 40% bonds. And that way when the market goes up, you get to enjoy the benefits of the stocks and then when the market goes down, the bonds kind of taper off the losses because in a difficult environment, if you were to go all stocks, the math works this way.

Let’s say you had a 50% loss in your stocks, and you had all 100% stocks, it would take you 100% to get break even. So, the point I’m trying to make is, having this balance, so to speak, 60-40 is not perfectly balanced, but it helps taper those down years a little bit to where you have a down year.

You fall off the porch, not the roof. You’ve heard me talk about this, but the 60-40 is just it’s not uncommon to have a 60-40 investing strategy. Well, it had its worst year in 2022, in generations. And so, what does that mean? You know, first of all, how did that happen? And then what do we do now?

So, it’s really interesting that I’m going to just read some of this article to you. So. Yeah. Okay. I’m sorry. I hesitated to be curious where I wanted to start. I’m just going to start from the top. So, over their 50 years of marriage, Dave and Kathy Lindenstruth adopted a time-honored Wall Street strategy to safeguard and grow their retirement nest egg.

A mixed 60% US stocks and 40% bonds known as the 60-40 portfolio. Now it is failing them. This is a quote from Dave Lindenstruth. He said, there have been some days more recently where I’ve looked at my portfolio and gone, crap. So maybe you don’t look at your statement, But I want you to know the 60-40 has really hurt.

But why? Usually, we can rely on this. There’s been many years that it’s been reliable, but lately it hasn’t been. Well, let’s look at the 60%, the 60%, which would encompass stocks specifically last year. I mean, they’ve really struggled outside. Now, there’s been some comeback, but outside of just a little bit of tech, mainly NVidia’s and the Apples.

They’ve really struggled. If you look at the S&P 500, which is the 500 largest U.S. stocks, nearly half of them are negative. The headlines haven’t really told the truth on the negative stock market performance. And that includes not only the large companies, but the small companies as well stocks outside of just a specific technology group. I mean, stocks haven’t, I mean they just have struggled.

So, let’s go to the bond side. Why aren’t bonds helping kind of, you know, help pull the portfolios up? Well, when interest rates go up, bond prices go down and the Fed raised interest rates so fast that the bonds just couldn’t handle it and they fell. And they’re just really, really struggling. So, you’ve got the stock struggling and the bonds struggling. Last year, 2022, they lost this 60-40 strategy, 60%, stocks, 40%, bonds lost 17%.

That’s its worst. That’s the worst performance. Hear me out. This is the worst performance of that type of portfolio since 1937. I cannot believe it when I read that the worst performance of a 60% stock, 40% bond down 17% last year is its worst performance since 1937. I mean, I just can’t, I just can’t believe it.

And just when the Fed raised interest rates so fast and some people are like, hey, did the Federal Reserve do good or bad by raising those interest rates? I think the jury is still out. I’ve seen a commentary that talked about the Federal Reserve doing a good job in a bad job. So, I’ve seen it with both hands, I think.

I think we won’t be able to judge until we get away from the chaos right now. But I think the biggest question is, okay, we suffer through this really, really difficult year. What do we do now? I mean, do we stick with it? Is it going to work going forward? I mean, this portfolio construction, I mean, it worked good in 2008, you know, when we had that big market crash, when the Congress had a bailout system, then your 60-40 portfolio did its job.

If we even go way back, like to 1917, when the U.S. entered World War One, it worked. If you go back to 1974, when energy prices and double-digit inflation were in, you know, Richard Nixon, it worked then, too, but it did not work last year. It did not work. So, what do you do now? It has been my experience doing this, you know, being a student of finance since 1995. Honestly, since I was 18 years old, I’m not just kind of curious.

People who know me know I’ve been a nerd in this business for years and it’s really nice to be comfortable in your own skin. It takes you a long time to get there, like because, you know, but you can’t articulate it and you can’t articulate, like with conviction. So, you know, you’ve been some of you guys have been down the journey of maturity.

And I want to be able to articulate something with conviction with you. Abandoning a strategy because it had a bad year is a bad idea. It’s just a bad idea. That’s how you permanently lose money. I had a client that got upset because most of our clients are really good clients. I mean, we’ve I don’t know, we don’t really have any bad clients, but I had this one client who got upset because we had a bad quarter, and it really wasn’t a bad quarter.

If you really take inventory of the numbers, it was a pretty good quarter. But there is just a lot of stuff going on. One quarter pulls this money out. I feel bad for them. That’s a bad decision. Like you have a bad quarter, you just don’t yank your money out because these things reverse pretty quickly and that includes the 60-40 portfolio.

I am not a fan of saying last year was the worst year ever. I’m going to change strategies; I’m going to switch money lanes. That’s like going to Austin and going on I-35 and the lane next to you is moving faster. And so, you’re like, I’m going to move into the next lane and then all of a sudden that lane slows down and then you move to the next one and you’re getting nowhere.

Now, sometimes that works. Don’t get me wrong. You’ve got it, some stalled car. But in the financial business, switching money lanes kills you. It destroys your wealth. I mean, it is one of the worst things you could do. I had a bad quarter. I had a bad year. People do this on their 401ks all the time.

They look at their 401k and say, that’s a bad fund. I’m going to move to this fund. And they do this over and over again and then that funds the best one and they just keep missing it. 60-40 did badly last year. I have generally no desire to course correct after a bad year if anything I take a contrarian approach.

The worst portfolio last year ever since 1937. Probably. We won’t be the worst thing this year. Next year? Probably not. But that’s a much healthier approach. But let me give you some substance of why it probably won’t do that. Okay. That way we just don’t do it just based on heuristics or rules of thumb, because they can be generally good.

But I want some substance, some data that supports that heuristic. So first of all, if you think back what I told you about the majority of stocks being down, that would imply that there could be some stocks in this universe of publicly traded companies, companies that are making products and services that are important to us today: tires, toothpaste, toilet paper, all the stuff that we need and stuff that we like, whether it’s Marvel movies or whatever, shoes, toys for Christmas, all that stuff right they’re still baking these companies are these products and services that we still consume. Just look around you right now. There’s products and services that you’re using right now that are going to continue to be consumed. And these stocks are priced lower than they were a year ago, many of them. That is good for somebody who is either a buyer or it stays steady.

So, when stocks are down, that’s typically a blue light special. But let’s go. That’s only 60% of the equation. What about the bond side? Bonds may not be at the very end of their stress, but they’re pretty darn close. So, the Federal Reserve has been raising interest rates. And when interest rates go up, bond prices go down.

But if you talk to any economist or Wall Street nerd, we’re talking about getting very close to the end of raising rates. And when that’s done, it’s my conviction that bonds might be a very attractive place for retirees because you’ll have better interest rates to support your bonds. You know, bonds. Several years ago, you were lucky to get 1 or 2% interest on a bond.

Now we’re talking 5, 6% interest. So as the Federal Reserve begins to stop raising interest rates, bonds look much more attractive. We’re getting much better yield on it. And the third reason is, and if you’re working with PAX, you already know this, but some of the alternatives to stocks and bonds are also becoming attractive. And if you’ve been working with us, you know that we’ve been enjoying the usage of something called a structured product that has some elements of upside appreciation but some protection along the way.

Now, with all that being said, full disclosure, there’s a lot of nuances to them, but it’s kind of a third piece that we’ve been adding to portfolios to further diversify and allow us to meet our financial goals. So, for me, I don’t look at this as a negative. I’m bummed that we had to go through a year like this.

But my experience has been that switching money lanes is dangerous. Maybe we make minor modifications knowing the information, thinking about heuristics, but taking away emotions and staying the course. I know it sounds overly simplistic. And last thing, I’ll say that before I close out my journey in the maturation of my experience, this industry used to throw out these rules of heuristics and rules of thumb and simplicity.

And I thought it was intellectually dishonest. I thought people had all these buy and hold, think long term. That’s just stuff for people who don’t know. Then I became sophisticated, got all these degrees and figured out all these other things and other ways to do it. That did not work. And here I am back to these simple rules of thumb and tried and true principles.

It took me 20 years to get there, but they work. Stick to the plan. I hate saying that because it feels almost like a cop out. Stick to the plan. You know, everyone says that. But actually, you know what? It’s true. Don’t overthink it. Don’t get emotional. Do check with your advisor. You might have some modifications. We’ve seen a few things that we can do to improve the environment’s changes.

New things happen. So just minor modifications, but not an overhaul. You’re not alone. The 60-40 had a rough year. You’re not alone if you have that portfolio. But stick with the plan. Double check your stuff just to double check. Make sure you make some modifications. And as always, remember, you think different when you think long term. Have a great day.



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