The 60/40 Portfolio is Dead.
The once-reliable 60/40 portfolio, long hailed as a safe and diversified investment strategy, is showing cracks. With bonds collapsing and stocks experiencing heightened volatility, investors are beginning to question whether the strategy can still deliver reliable returns in today’s financial landscape.
In this article, we’ll explore why the traditional 60/40 portfolio and target-date funds have faltered, the economic forces behind these changes, and why it’s time to consider a new, more dynamic approach to portfolio management.
Q: Where does the 60/40 portfolio come from?
A: ACADEMIA!
- Born in the mid-20th century, combining 60% equities & 40% bonds.
- Built on Modern Portfolio Theory (MPT), promising diversification & risk mitigation.
- It worked when stocks & bonds often moved inversely. Not anymore.
The 2022 Wake-Up Call: Stocks and Bonds Don’t Always Move Inversely
In 2022, the markets provided a harsh lesson for 60/40 investors. For the first time in decades, both stocks and bonds posted significant losses in the same year. Stocks declined by 19%, while bonds dropped by 22%. This simultaneous downturn exposed the weaknesses of the traditional portfolio approach, which was supposed to mitigate risk through diversification.
For many investors, it took over two years to break even on their 60/40 portfolios—a sobering realization of how outdated this strategy has become in today’s economic environment.
Target-Date Funds Aren’t Immune:
Target-date funds (TDFs), which automatically adjust the balance between stocks and bonds as investors approach retirement, are often seen as a safer, more hands-off investment strategy. However, TDFs have been equally vulnerable to the same market forces that have impacted 60/40 portfolios.
- TDFs control $3.5 trillion in assets.
- TDF fell as much as -25% in 2022, exposing retirees to significant market risk.
Over 83% of investors rely on TDFs, yet these one-size-fits-all strategies fail to account for the unique financial needs of individual investors. The simplicity of TDFs masks their significant flaws.
Are You Paying More for Underperformance?
Here’s a staggering reality: 83% of investors use target-date funds, but many don’t realize they’re paying higher fees for subpar performance.
The 2055 target date fund (most aggressive) underperformed the S&P 500 by 8% last year.
VOO fees are .03% The ITDG target date funds fee is 0.12%.
This discrepancy highlights a major issue: investors are paying more for underperformance.
Why Are These Strategies Are Crumbling? The inflation factor.
The main culprit behind the failure of the 60/40 portfolio and target-date funds is inflation. Over the past three years, cumulative inflation has surged by 22%. While the Federal Reserve initially labeled inflation as “transitory,” it’s clear that rising inflation and interest rates are here to stay.
With more than 40 years of declining interest rates behind us, today’s environment is characterized by rising rates and persistent inflation. Unfortunately, the outdated diversification strategies of 60/40 portfolios and TDFs no longer provide the protection investors once relied on.
It’s time to rethink your portfolio.
The Hedgeye investment process offers a dynamic, risk-managed approach that better navigates the complexities of today’s market.
Unlike the static 60/40 model or one-size-fits-all target-date funds, Hedgeye’s methodology is designed to adapt to changing market conditions—especially in an era of persistent inflation and volatility.
Hedgeye Founder and CEO Keith McCullough often contrasts the flexibility of the Hedgeye process with outdated strategies like 60/40, saying:
"If you have Old Wall friends who want to tell you that the “60/40” Asset Allocations embedded in their hard-earned retirement accounts is better than our dynamically risk managed #GoAnywhere Full Investing Cycle #process, you can ask them if they’re either joking or completely Macro Unaware…" -Hedgeye Founder & CEO
Join us for a #BetterWay to invest. Stay ahead of the big market trends with Hedgeye CEO Keith McCullough's daily market strategy note the "Early Look."
