The Investment Scientist

What Can a 60/40 Portfolio Deliver?

Posted on: April 4, 2016

60 40 portfolio.jpgThe 60/40 portfolio, one that consists of 60% equity and 40% bond, is very common. Most of my clients use a variation of this portfolio. Because of this, I want to understand how this portfolio performed in the past.

For this study, I use the S&P 500 for the equity portion and the 10 year treasury bond for the bond portion. The market data I use is from 1928 to 2015. Note that this period includes the Great Depression.

The portfolio is rebalanced every year to maintain the 60/40 allocation. Then I examine five return intervals: 1 year, 2 years, 5 years, 10 years and 20 years. For each return interval, I calculate the average return, best return and worst return.

Here are the results I get. Note all numbers are annualized returns without the % sign.
Interval 1 year 2 years 5 years 10 years 20 years
Average 8.55 8.55 8.55 8.55 8.55
Best 32.85 25.75 20.15 16.04 14.78
Worst -27.55 -20.6 -5.37 1.8 3.48
What can I learn from these results?
  1. The 60/40 portfolio can still be quite risky in the short term. Note that the worst returns for the 1 year and 2 year intervals are -27.55% and -20.6% respectively. These are steep losses nobody likes.
  2. The worst return for the 5 year interval is a much smaller -5.37%. It’s clear that the longer the investment horizon, the better the risk/reward ratio. In fact, after 1941, there has never been a 5 year interval that this portfolio has a negative return.
  3. Never in history did this portfolio ever produce a negative return in the 10 and 20 year interval.

Most people’s retirement investment horizon is 20 years. The worst 20 year return is an anemic 3.48%. The best is 14.78%. The average is 8.55%. Even the worst return will nearly double your money in 20 years!

 

If you invest consistently into the 60/40 portfolio during your working years and divest consistently during the the retirement years, that is, avoid lump sum investment and market timing, your long-term return will most likely be not as low as 3.48%, and not as high as 14.78%, but around the average of 8.55%.

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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