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In my July 2022 commentary, I discussed how the drumbeats for the “death of the 60/40 portfolio” had resurfaced yet again. In fairness, 2022 was the sixth-worst year for a 60/40 portfolio and was on pace to be the worst if not for a year-end rally. So it makes sense that the roughly -16% return in 2022 brought many out of the woodwork to declare it was dead—again. There were times when even my patience was tested. But history has a funny way of reversing course when you least expect it.

Stock and bonds bottomed in mid-October and have since been extremely resilient. In the face of continued political unrest, bank failures, and worries of a hard landing, stocks and bonds have responded with force.

It is important to note that a 60/40 portfolio is commonly defined as the S&P 500 Index (60%) and the U.S. Aggregate Bond Index (40%). While these holdings provide some diversification, they ignore countless asset classes that should be part of a properly diversified portfolio. Truth be told, for much of the past decade, owning just these two worked out since the S&P 500 consistently outperformed. But with international equities outperforming since the start of last year, we are starting to see a shift.

As of this writing, a 60/40 portfolio composed of just the S&P 500 and the U.S. Aggregate Bond has returned 6.95%, while a diversified 60/40 portfolio has returned 9.45% since November 1, 2022. Both returns are nothing to sneeze at, and while they do not make up for the drop experienced last year, they are an encouraging sign.

What makes the returns even more impressive is that talks of a recession were heating up in November, and the economic outlook for most regions was shaky.

Missing out on returns of this magnitude can have a dramatic impact on your portfolio and financial goals.

The performance gap between the two 60/40 portfolios deserves a closer look and speaks to the power of diversification.

The chart above highlights the outperformance of international developed and emerging market equities over U.S. large caps. The biggest driver for overseas equity outperformance has come on the back of a weakening U.S. dollar. On the bond side, tax-exempt (municipal) and corporate bonds outperformed the Total U.S. bond market. The standard deviation of both, measure of risk, is comparable at 13.03% vs. 15.18%.

Either way you slice it, the 60/40 has not only shown signs of life but has come back with a vengeance. Of course, there are no guarantees it will continue, but these returns were hard to imagine six months ago. This comes back to the adage, never try to time markets—it rarely works! Even the brightest economists are wrong far more often than right.

Does this mean we are out of the woods? Of course not. I suspect continued volatility as we work our way through things. But I will leave you with an eye-opening statistic. Over the past 50 years, whenever a 60/40 experienced a negative annual return, it yielded a positive return the following year 75% of the time, with an average gain of 13%. Who would object to that?

Stay focused on what matters.

Discuss your situation with a fee-only financial advisor.