Is the 60-40 investment portfolio dead?

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Investment experts stress the importance of creating a balanced, diversified portfolio of assets. This approach can help reduce the risk that your investments can face sudden, sharp swings in value.

For a long time, many investors have used the 60-40 approach as a guide when creating their investment mix.

A 60-40 portfolio refers to the practice of putting 60% of your investments in company shares – also known as equities – and the remaining 40% in bonds (a fixed investment where you lend money and gain interest on your lending) issued by companies, governments and other organisations.

In the past, equities have generally been seen as carrying more risk, while bonds have been viewed as a safer bet.

However, recent losses in bond markets have brought the 60-40 portfolio – and the assumptions underlying it – back into focus.

Now, this look at a 60-40 portfolio is not a personal recommendation and is just one way to invest that's not necessarily suitable for everyone. Many investment firms offer ready-made portfolios that have different balances of equities, bonds and other assets, including cash.

Do remember that, while diverse investments are a noted way to build a portfolio, investing in equities and bonds can put your money at risk, with no guarantee you’ll get back the money you put in. It can be worth speaking to an independent financial adviser if you’re unsure about what approach best suits your personal circumstances, goals and appetite for risk.

How the 60-40 portfolio works

Investors are often advised not to put all their eggs in one basket – for example, investing all their money into a single company share, as they could quickly lose a lot if the share price fell.

By spreading their money across a range of shares and other assets, including bonds, the chances of all the investments falling at the same time are significantly reduced.

It also means that if one investment performs badly it doesn’t have too big an impact on the overall value of your portfolio. This is known as diversification.

Over time, history has proved equities tend to perform better over the long-term, but there will be volatility in the short-term with the value of your holding going up and down.

Bonds, meanwhile, tend to have had lower levels of volatility but also lower long-term returns. Importantly, from a diversification point of view, bonds often performed better at times when equities are weak, and vice-versa.

This helps to even out returns over the long-term, something that can be important for investors who do not want the value of their holdings to suffer sudden drops.

“The 60-40 portfolio has been around for about 100 years, and it was pioneered by an investment manager in the US called Wellington,” explains Ben Yearsley, Investment Consultant at Fairview Investing.

“There are two factors that make the concept work. Firstly, it gives a blend of growth from the equity portion – which you need for the longer term – and the income element from the bond portfolio.

“The second point is that, in theory, when the economy hits the buffers and a recession occurs, equities will fall, but as interest rates normally get cut in order to stimulate demand, bonds will increase in price.”

The prices of bonds traded on the stock market change as interest rates in the wider economy rise and fall.

For example, when rates come down, bond prices typically rise: this is because the fixed rates paid by the bonds become relatively more valuable, and demand for them increases.

The opposite is true when central banks raise interest rates.

Is the 60-40 portfolio dead?

However, the end of the pandemic created economic conditions that threw the assumptions underpinning the 60-40 philosophy into question.

“For the last 100 years, 60-40 has generally worked,” says Yearsley. “But in 2022, when recession hit, rates couldn't be reduced as they were already at rock bottom. Therefore, while equities fell, bonds couldn’t compensate as rates weren't cut.”

In fact, Yearsley adds, the high levels of inflation that had resulted from the reopening of the global economy following the pandemic meant that central banks, including the Bank of England, were forced to raise interest rates.

“This meant that both bonds and equities fell in price,” he says.

As interest rates are no longer rising – and are even expected to fall later this year – the outlook has improved, in the opinion of Scott Gallacher, Chartered Financial Planner at Rowley Turton.

“Now that the pain has been felt, the 60-40 portfolio is back in vogue and should again be a good option for most investors.

“It could, however, be too risky for more cautious investors who would be better served with less equity exposure and perhaps more on deposit.

“However, for higher-risk investors, it is probably too pedestrian, and they risk missing out on potential returns they could expect from having a higher weighting in equities.”

He points out, however, that as people age, their risk profile tends to get more conservative. “In particular, when we retire and no longer have our salary to cover any investment losses, many of us are tempted to rein in the risk on our investment portfolios.”

Yearsley adds: “The 60-40 concept is fine, but there is a bit of an issue, in my view, if you use it too early in life. Quite simply you need your pot to grow, which essentially means equities for most people.

“If you retire at 60, say, you might have 30 years to live off your investment pot. Too much invested in bonds and you're struggling to keep pace with inflation.”

The 60% equities-40% bonds investment portfolio has been a strategy that has generally worked well for many investors for much of the past century, although this previous performance does not mean the same will be true for the future, as recent times have shown.

While the economic environment in recent years has been turbulent, the outlook does seem to be more promising and therefore makes a 60-40 split a possible alternative once more.

But this isn’t guaranteed to be the case and you should take professional advice depending on your own situation.