The 60/40 Portfolio Makes a Comeback

This year, the financial world faced some challenges because things were uncertain. At first, people thought that interest rates were stopping from going up, but then the US economy surprised everyone by staying strong despite higher rates. This caused a bumpy ride for the financial markets during the summer.

In September, the Federal Reserve (Fed) and Bank of England (BofE) decided to take a break from increasing interest rates. However, because the economy is still doing well, it’s unlikely that they’ll lower rates anytime soon. This means interest rates might stay high for a while, which some call the “higher for longer” scenario. With all this market unpredictability, mixed signals from central banks, and ongoing ups and downs, it’s important to consider your investment options.

The classic 60/40 portfolio, with 60% in stocks and shares and 40% in bonds, is making a comeback. This portfolio was popular after the Global Financial Crisis of 2008 because both stocks and bonds did well thanks to low interest rates and little inflation.

But in 2022, rising inflation and fast rate hikes caused problems for both stocks and bonds. Bonds lost value, and stocks fell together, leading some to say that the 60/40 portfolio was dead.

However, the current economic situation makes the classic 60/40 mix worth revisiting. Central banks like the Fed and BofE have raised rates aggressively, leading to the highest government bond yields in 15 years.

Now, bonds can provide a stable income of around 5% annually for balanced portfolios. Some stocks, after a tough 2022, are starting to look like good investments again.

This change is important because it challenges the recent trend where stocks were the big winners in investment portfolios.

Advantages of the reborn 60/40 portfolio include reliable income from bonds and the chance for long-term gains from stocks. Stocks are still a big part of portfolios, helping your money grow over time.

The Cash vs. Stocks Choice

For the first time in nearly two decades, people who save money are benefiting from high-interest rates, with some accounts offering more than 5%. However, holding onto cash might not be a good long-term plan because it probably won’t keep up with rising prices. Fixed-rate savings accounts and timed deposits can seem safe but might mean missed opportunities if better investments come along. Even though high-interest cash accounts are appealing now, they’ll likely offer lower returns when interest rates drop, which can hurt your buying power.

The Dangers of Trying to Time the Market

Trying to guess what the stock market will do is really tough, even for experienced investors. Markets react quickly to news, making it hard to make the right predictions. Missing a few key days in the stock market can have a big impact on your returns. So, consistently trying to pick the best or worst days can be risky. Trying to decide when to buy and sell might mean missing out on chances for your investments to grow, which can hurt your overall money growth.

To sum it up, the economic situation in 2023 has created chances for a revamped 60/40 portfolio, combining bond income with the chance for long-term stock gains. While high-interest cash accounts may look good now, they might not help you keep up with rising prices in the long run. Trying to guess the right time to invest is hard, so it’s better to stick with a mix of investments to help your money grow over time and handle the ups and downs of the market.

Best Regards

Andy Brooks

Managing Director

Brooks Wealth