Is 60/40 Dead

Follow the whole story: every piece in this series is on our AI storyline page.

Short answer: 60/40 isn't dead. It has one blind spot, and you can see it in a single year. Here's the part worth staying for: a mix that adds dividend stocks, a little gold and a little cash lost less than half as much as 60/40 in 2022, and it still earned more a year. We'll come back to what that mix gives up, because it gives up something.

"Know the worst case before you need it." - Anonymous

What Does Everyone Already Know?

That 60/40, six parts stock fund to four parts bond fund, is the default plan for a lot of retirement money. The idea is simple: when stocks have a bad year, bonds usually have a decent one, and the mix comes out bruised instead of broken.

Thursday was that idea working in miniature. SPY fell 4.4%, on the AI trade unwinding, and the Nasdaq-100 fund 6.5%. The bond fund AGG edged up, and so did long Treasuries and gold. A 60/40 mix of SPY and AGG would have fallen a bit more than half as much as the stock fund. And everyone also remembers 2022, when the bond half didn't help at all.

When Did 60/40 Work, And When Didn't It?

We ran 60/40 (SPY and AGG, rebalanced monthly, dividends included) for every calendar year since 2004. Five years tell the story:

In 2008 bonds cut the loss by more than 15 points. In 2022 they cut it by about 2.

2008 was a growth scare: the economy cracked, rates fell, bond prices rose. 2022 was an inflation scare: rates jumped, and bond prices fell along with stocks. In the 22 full years since 2004, 2022 is the only one in which both SPY and AGG lost money. 60/40 had only three losing years in those 22: 2008, 2018 and 2022. One bad year in 22 doesn't make 60/40 dead. But it was the year nobody's plan expected.

How Low Did Each Piece Go, And How Long Did It Take?

The calendar hides the worst of it, so here's the classic Trefis check: each fund's fall from peak to bottom, and how many months it took from the 2022 bottom to get back to its old high, on daily prices with dividends:

After 2022 the "safe" half took nearly three years to get back to its high, about two and a half times as long as stocks. Long Treasuries still haven't.

That's the blind spot in one row. In 2022 the bond fund wasn't a shock absorber; it was a second shock, and a slow one to heal. Gold and dividend stocks fell too, but not at the same moment or for the same reason, and cash simply didn't fall.

What Holds Up In Both Kinds Of Years?

Here's the part that will still matter in 2027. We tested a handful of mixes over the last nine and a half years (April 2017 to October 2026, rebalanced monthly), a stretch that includes the 2020 crash and 2022. Four of them:

The four-part mix had the smallest worst drop, lost far less than 60/40 in 2022, and earned 3.3 points a year more.

It also healed faster. On month-end values, the four-part mix was back at its old high about nine months after the 2022 low; 60/40 took about 17 months and the S&P 500 fund about 15.

Why it worked: the four pieces don't fail at the same time. Dividend payers held up in 2022: the Trefis Income Solution, 50 dividend stocks weighted by size, was up 2.9% in its back-test that year while the S&P 500 fell 18.2%. In S&P 500 selloffs it lost about 35% less on average, its page shows. And it pays a 3.0% dividend yield today, about three times the S&P 500's. Gold rose in 2008 and was roughly flat in 2022, and cash gained a little in 2022 while bonds lost 13%. Bonds only cover one kind of bad year. These pieces, together, covered both.

What Does The Bond Half Pay You Now?

Here's what's less random than next year's headlines: the starting yield. Trefis tracks the gap between what the S&P 500 earns for you (its earnings yield) and what the 10-year Treasury pays:

Going into 2022, stocks out-yielded the 10-year by about two and a half points. Today the gap is about half a point in bonds' favour.

At Thursday's close, SPY's earnings yield is about 4.3% against 4.84% for the 10-year Treasury. That's the other half of the 2022 story. Back then the bond half paid very little, so it had no income cushion when rates rose. Today it starts with one. That doesn't make bonds safe from another inflation scare; it means the bond half is being paid more to wait than it was in 2021. It's also a reminder that the stock half is no bargain on yield: even on next year's expected earnings stocks are only about half a point ahead.

Gold has its own scoreboard. Over the past three years SPY is up 74.8% in dollars but down 14.0% priced in gold. A 10% gold slice isn't a bet against stocks; it's a different kind of insurance.

What Does The Four-Part Mix Give Up?

Now the honest part. It trailed a plain S&P 500 fund by about 1.8 points a year, because in strong rallies it keeps only about 75 cents of every dollar the index makes. In the 2020 crash, a growth scare, plain 60/40 actually fell less on month-end values. On a day like Thursday it isn't magic either, though the Income Solution's 50 holdings fell about a third as much as the S&P 500. Its edge shows up over a whole bad year, not a single bad day. The window is short too: it starts in 2017, so it has lived through one 2022 and no 2008. And the Income part is the Income Solution's back-test, before fees.

What Should You Do This Week?

1. Run your own mix through 2008 and 2022. Not last month, those two years. If you don't know how it did, that's the first thing to find out. Write down the dollar loss and how long it took to come back, not just the percent.

2. Ask which kind of bad year you're covered for. If your only shock absorber is bonds, you're covered for a 2008 and exposed to a 2022. Adding a slice that holds up when inflation is the problem (dividend payers, a little gold, some cash) covers the other kind.

3. Change the mix on a quiet day, not a 4% day. The move this replaces is selling stocks after a bad Thursday, or dumping bonds because of 2022. Both lock in a decision made under pressure. Decide the mix calmly, then rebalance on a schedule; our one-page plan puts the rules on a single sheet of paper.

The risk: a mix built for two kinds of bad years will lag in a straight-up market. Over the test window that cost was about 1.8 points a year against the S&P 500. If you'd regret that more than a 2022, the plain index fund may suit you better.

What's The Bigger Idea?

We call it Exposure hides in plain sight. "60 stocks, 40 bonds" sounds like two bets. In 2022 it turned out to be one bet on interest rates staying low, made twice. The question isn't how many funds you own; it's how many different kinds of trouble your money can survive. Know the worst case for each kind before you need it.

60/40 isn't dead; it's half-insured. It worked in 2008 (bonds +8.3% while stocks fell 36.8%) and failed in 2022 (both fell, the only such year since 2004), and the bond fund then took about 35 months to recover. A mix of 40 Income, 40 S&P 500, 10 gold and 10 cash lost 6.2% in 2022 and earned 12.8% a year since 2017 (model, before fees), at the cost of lagging strong rallies. The bond half starts with a better yield today than in 2021. Test your mix in both kinds of years, then hold it whichever way the next one goes.

What Should You Ask Next?

Follow this story with us: we'll keep running these mixes as the year closes and tell you which ones held up.

Would Your Mix Survive A 2008 And A 2022?

Most plans are tested for one kind of bad year. If you have $1 million or more invested, have a Trefis expert partner advisor test your mix in 2008 and 2022 for a second opinion in a free 15-minute call, and ask about Invest With Trefis and its Income Solution.

For questions about this article or underlying research, email [email protected].