As Good As it Gets?

We’ve heard about the death of the traditional 60/40 portfolio for a few years now. With the benefit of hindsight, and some valuation expansion, it appears it was buried alive.

This boring, two holding portfolio (Barclay’s Aggregate Bond Index, S&P 500, annual rebalance) has had positive returns for nine straight years. $1 has compounded at 10.8% a year, for a 152% total return.

It’s closed at an all-time high for 13 straight months, and is up for 14 straight months, for just the second time ever. With a positive January, this portfolio will have enjoyed its longest stretch of consecutive monthly returns ever.

It has also done so with hardly any anxiety. On a monthly closing basis, it hasn’t been more than 5% away from its all-time high since 2011.

Which all begs the question, are the best days of the 60/40 portfolio behind us? Research Affiliates seems to think so. They’re projecting a 0.5% real return for the next decade.

We’ve seen these warnings in the past, and just because they haven’t panned out, it doesn’t mean we should throw them in the garbage. Here’s the math: Assuming bonds give you 3% for the next decade, then stocks have to give you more than 16% a year to match the returns of the last nine years. This seems unrealistic, to put it mildly. The good news is that there is a universe beyond the S&P 500 and Barclay’s Agg, and there are sensible strategies outside of buying and holding. The bad news is that, well, for the 60/40 portfolio, this is probably as good as it gets.