Blackrock: Rebuilding Resilience in 60/40 Portfolios
Most investors haven’t been all-in on stocks. There tend to be other assets in the mix, such as bonds. That tends to provide solid diversification, as well as lower portfolio volatility overall.
Yet 2022 saw the first year since the 1930s where both stocks and bonds dropped at the same time. And both did so by a sizeable amount. For investors with a traditional mixed portfolio of 60 percent stocks and 40 percent bonds, diversification proved ineffective.
Typically, bonds and stocks tend to move in opposite directions. When high-flying stocks start coming back to earth, investors tend to invest more in stable investments like bonds.
However, interest rates also play a role. The rapid rise in interest rates has led to a lowering of bond prices. Meanwhile, it’s led to a lower valuation for many companies out there today.
How can investors avoid this challenge in the future? There are a few different strategies that can work. One is to recognize that bonds may perform well in a slowing economy, but not an inflationary one.
Another factor is to diversify into alternative investments, such as real estate or rarities like artwork. These alternatives will diversify a portfolio best with their low correlation and high return potential.
The goal isn’t to outperform the market on the way up, but rather to hold onto your gains during a market decline.