The traditional 60/40 investment portfolio has experienced significant growth in 2023, bouncing back from a disappointing performance in 2022. As of December 27th, the portfolio’s year-to-date performance stands at approximately 13%, benchmarked by the iShares Core Growth Allocation ETF (NYSE:AOR). This performance figure is the third-best year for the strategy since it was established in 2008, ranking behind only the strong years of 2009 and 2019.
As we move into the new year, investors are contemplating whether the favorable conditions that supported both equities and bonds in the second half of the year will persist.
The 60/40 portfolio, known for its simplicity and effectiveness, is a time-tested investment strategy. It involves allocating 60% of the portfolio to stocks and 40% to bonds, aiming to strike a balance between risk and reward. By combining both asset classes, the portfolio diversifies naturally, potentially reducing the risk of significant losses as stocks and bonds react differently to market conditions.
In 2022, the traditional 60/40 portfolio faced challenges due to the Federal Reserve’s aggressive interest rate hikes, which affected both equities and fixed-income assets. The portfolio fell as much as 17%, erasing a significant portion of the pandemic rally. However, it rebounded to its current value of $928 after initially dipping below $800 in November of that year.
In 2023, as inflation subsided, traders anticipated a normalization of interest rates, leading to expectations of rate cuts by the Federal Reserve in 2024. However, it remains to be seen whether these anticipated rate cuts will be delivered by the Federal Reserve. If they do materialize, bond yields are likely to continue heading lower, benefiting fixed-income assets and certain rate-sensitive stocks. Conversely, if inflation declines stagnate or new pressures arise, the Federal Reserve may not deliver as many rate cuts as expected, potentially disappointing the markets and impacting both equities and bonds.
Looking ahead to 2024, the performance of the 60/40 portfolio will depend on whether the anticipated rate cuts materialize and how economic factors evolve.
Aside from the iShares Core Growth Allocation ETF (NYSE:AOR), there are several other ways for investors to construct a 60/40 portfolio. These strategies involve pairing different stock and bond ETFs to achieve the desired allocation.
In summary, the 60/40 portfolio had a strong revival in 2023, but its performance in 2024 will be influenced by the delivery of anticipated rate cuts and the evolution of economic factors.