Market commentators have devoted much energy over the past year to debating whether it’s time to write off the traditional 60/40 approach to investing that broadly allocates 60% of a portfolio to equities and 40% to fixed income. Rather than being drawn into that discussion, we believe it’s more constructive for investors to focus on understanding the macroeconomic conditions under which the effectiveness of a 60/40 portfolio may be challenged and what this means for portfolio construction going forward.
- Periods of higher inflation, uncertainty, and lower liquidity can lessen the diversification benefits of a 60/40 portfolio.
- During periods of monetary expansion, typically driven by accommodative monetary policy, there tends to be a modest positive correlation between stocks and bonds, but we would note that both asset classes’ returns are generally positive during these periods, noted by our data.
- Elevated market volatility has a modest effect on the potential diversification benefits that a 60/40 approach can offer.