Scorned 60/40 Model Finds Allies in Biggest Test Since 2016

The 60/40 portfolio saw investors through the cataclysm of the pandemic. The global recovery is now proving an even tougher test.

The strategy -- an investing stalwart since it arose from Harry Markowitz’s Modern Portfolio Theory about a half-century ago -- was already under pressure from the historic decline in bond yields. But the sharp move in the opposite direction is a more immediate threat, as recent market volatility has triggered tandem declines in stocks and bonds.

That jeopardizes the relationship at the heart of 60/40, which relies on the smaller, fixed-income allocation cushioning losses when riskier assets slump. The prospect of a faster economic recovery due to vaccines and heavy government stimulus has hit bonds hard, driving yields up at a speed that’s roiled equity markets. The method now faces one of its most severe tests since 2016, when U.S. President Donald Trump’s election raised expectations that lower taxes and lighter regulation would turbo-charge growth.

Portfolios based around 60/40 performed in 2020, with Bloomberg indexes tracking global and U.S. models providing returns of 14% and 17%, respectively. That hasn’t silenced calls to rethink or abandon the strategy, which mounted after losses in 2018. Cathie Wood recently suggested adding Bitcoin as a hedge against inflation.

Still, the strategy has some prominent defenders.