Worst 60/40 Portfolio Returns 100 Years?

With around 50 trading days left in 2022, it looks more and more likely that this will be among the very worst years in history for investing. Since World War II, there have been only three instances, in 1974, 2002 and 2008, when the S&P 500 ended the year down more than 20%. If 2022 ended today, it would mark only the fourth time.

The scatter plot below shows each year’s total returns for the S&P 500 (horizontal axis) and U.S. bonds (vertical axis). As you can see, 2022 falls in the most undesirable quadrant along with the years 1931, 1941 and 1969. Not only have stocks been knocked down, but so have bond prices as the Fed hikes rates at an historically fast pace.

Year to date, 10-year bond rate went up ~260%. Remember the bond yield vs bond price teeter tooter?

What this means is that the traditional “60/40” portfolio—composed of 60% stocks and 40% bonds—now faces its worst year in 100 years, according to Bank of America.

Here’s the logic:

  1. Stocks in the red = recession.
  2. Recession = rate cuts from the Fed.
  3. Lower rates = higher prices for bonds.

For the most part, the 60/40 rule has worked for investors… that is, until now.

Currently stocks are down and the Fed is increasing rates to try to buffer inflation. Increasing rates hammer bonds. The longer the duration, the bigger the hammer… and many fixed income investors went out on the duration to “chase yields”… not a good move…

Diversification matters more now than perhaps in any other time in recent memory. Real assets look very attractive right now. Real property. Tangible. Diversification doesn’t ensure a positive return, but it could potentially spell the difference between losing a little and losing a lot.

Hat tip to Frank and US Global.

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