Data & Research October 31, 2022

The Case for the 60/40 Portfolio’s Survival – In Two Charts

60/40 investing for long-term savers is coming under fire with the recent market downturn and rise in alternative options. Researchers at Leuthold Group break down why 60/40 may still have life in two simple charts.

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The 60/40 investment rule of thumb has been killed and revived many times over the years.   

Now, with equities (the 60) and fixed income (the 40) both seeing drops in value, that strategy is again being brought into question. There are louder calls for a more tailored mix of weighting in portfolios, including alternative investments such as real estate investment trusts (REITs), or even, due to higher interest rates, old school certificates of deposit (CDs).

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The investment research firm The Leuthold Group, based in Minneapolis, this October took a deep dive into the asset allocation for both a historic look, as well as considerations for the future. They didn’t come down definitely on the side of 60/40, but they do argue that, for long-term investing, it continues to show its value.

It’s true, Research Director Scott Opsal writes in the report, that “the 60/40 strategy is having a terrible 2022.” The results are clear in first chart below, which shows annual returns of a 60/40 stock and bond mix, with a stark drop in both this year.


Source: The Leuthold Group

Even so, the chart shows that, despite a bad year, the 60/40 strategy has worked pretty well over time.

“Since 1976 there have been nine years when the 60/40 portfolio posted negative returns,” Opsal writes. “Three of those years barely registered negative, and three others stopped short of a 5% overall loss. The only two annual declines of more than 5% came in the depths of severe equity bear markets in 2002 and 2008, and in both cases, bonds delivered positive returns to temper the overall loss.”

Then came this year, when values of both dropped together significantly.

What Next?

The question, then, is how to determine whether this is a blip in an otherwise good strategy, or a turning point. To get an answer, Opsal analyzed the “expected” returns for 60/40 investing over time. He then matched that to the year-by-year performance.

He found that the realized returns on stocks and bonds were “well above expected returns quite often in recent years, as signified by bars that reach higher than the green line.”

Source: The Leuthold Group

Through the research, Opsal estimates that rising valuations “boosted actual annualized returns almost 3% above expected return from the end of the 2002 Tech crash through 2021.” Even with this year’s drop, the excess return over expected returns over the last 20 years is an annualized 1.5%.

Going forward, returns may be even better, according to Opsal. The current falling stock valuations and rising bond yields have lifted estimated returns in a 60/40 mix to 6.9%, which “has greatly improved the attractiveness of 60/40 going forward.”

That said, the firm also notes that stocks and bonds tend to have the same sensitivity to inflation and interest rates, and opposing sensitivity to economic growth and unemployment. In short, “when inflation and interest rates dominate the conversation [today], we should expect a positive sign on correlation,” or more risk for market declines.

If a situation like the current one returns, “investors may be less willing to hold large allocations to equities when they are feeling bearish,” Opsal writes.

Alternative Options

The rise of Target Date Funds (TDFs), an age-based investment that generally allows for more risk when a saver is younger and gets more conservative over time, shows that many people know the 60/40 mix is not a one-size fits all. TDFs have grown in popularity in recent years, particularly among younger 401(k) participants, according to May research from the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI).

Many are also taking advantage of this moment to point out the need for alternative investments in portfolios, and research shows financial advisers are taking note.

Milind Mehere, founder and CEO of New York-based Yieldstreet, a digital wealth platform for alternative investments, says this is the natural evolution of investing.

He argues that institutional investors have already made the move to alternative investment strategies, and now the general public should have access as well.

“What we are really telling our investors is that you have to start modernizing your portfolio away from 60/40,” Mehere says. “Institutional investors are more than 50% locked into alternatives, but retail investors are just 5% invested in them. We need to start moving from 60/40 to 50/30/20 or something along those lines.”

The researchers at The Leuthold Group note in their report that, as with most investment decisions, timing will be everything.

2022 proved that “commentators were rightly skeptical about the strategy’s future prospects,” Opsal writes. “However, having experienced a record correction this year, the 60/40 is once again priced to deliver reasonable expected returns, albeit with more volatility caused by a diminished benefit from diversification.”

Compliance October 31, 2022

SECURE 2.0 Likely to Pass this Year

Three separate bills, dubbed SECURE 2.0 when taken together, are likely to be passed into law by this December, according to Washington insiders.

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Several Washington insiders say the package of three retirement reform bills, known as “SECURE 2.0,” are expected to be consolidated and passed sometime this December, adding to 2019 legislation aimed at increasing retirement plan access and savings in the U.S.

Two of the three bills, the Enhancing American Retirement Now (EARN) Act, and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (Rise and Shine) Act were advanced out of the Senate Finance and Health, Education, Labor and Pensions committees respectively, in June, by unanimous votes.

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The third, the Securing a Strong Retirement Act was passed by the House in May, on a vote of 414 to 5.

The original SECURE Act was the Setting Every Community Up for Retirement Enhancement Act of 2019.

Industry experts and Washington insiders expect the latest legislation to be consolidated into a single bill and passed sometime in December, during the lame duck period before the new Congress is sworn in next year. The final bill would likely be attached to must-pass legislation, such as a funding bill to replace the current continuing budget resolution that expires on December 16. Though there are many differences between the three bills, none are likely to prevent final passage, sources said.

Two or more of the new bills share 39 provisions, which observers say are the provisions most likely to survive into the final package in more or less the same form. Some key examples of provisions that are present in multiple bills are:

  • Reducing the number of years of service after which part-time employees must be made eligible for an employer-sponsored retirement plan will be reduced to two from three (all three bills).
  • Employers may match employee student loan payments with retirement plan contributions (SSRA and EARN).
  • Victims of domestic abuse may withdraw the lesser of $10,000 or 50% of the total value of their account without a tax penalty (SSRA and EARN).
  • An employee has the option to designate employer contributions as after-tax income, to be taxed in the current tax year, instead of when it is withdrawn (SSRA and EARN).

The bills also include some points of disagreement, such as different timetables for catch-up contribution changes and required minimum distribution changes, and whether auto-enrollment into employer-sponsored retirement plans should be required or incentivized with tax credits.

There are also some provisions that only exist in any form in just one bill. For example, only the EARN Act provides for the following:

  • Creates permanent rules for early withdrawals as a result of a disaster, allowing up to $22,000 to be withdrawn without penalty.
  • Allows for starter 401(k)s or plans that deduct from an employee’s pay without an employer match, for small businesses.

Senators Ben Cardin, D-Maryland, and Rob Portman, R-Ohio, published an op-ed in the Hill last week calling for SECURE 2.0 to pass this year, and expressed optimism that it would. They supported certain provisions found in the EARN Act, the Senate Finance Committee’s version. In particular they highlighted the student loan match, an expanded saver’s tax credit, a national plan database or “lost and found” to help participants find and retrieve retirement contributions, and increased tax credits for small businesses to incentivize employers creating retirement plans.

The op-ed cited an AARP study which noted that only 17% of Americans are very confident that they will have enough money for retirement. The study also found, however, that 42% are somewhat confident, 20% not very confident, and 16% not all confident.

The bills also enjoy support from industry executives. For example, Eric Stevenson, president of Nationwide Retirement Solutions, supports the legislation, and in particular, provisions that reduce barriers that keep employees for enrolling in their employers’ plans. He backs provisions that would allow a penalty-free $1,000 withdrawal for certain qualifying emergencies, such as car maintenance, as well as reducing the amount of service part-time workers need before being eligible to join plans. He notes that only 40% of part-time workers have access to retirement accounts.

Stevenson also explains that the concept of a plan “lost and found” is helpful because most workers change employers many times in their lives, and many lose track of old retirement accounts from previous employers. The EARN Act assigns this responsibility to the Treasury Department, whereas the SSRA assigns it to the Department of Labor.

According to Stevenson, the Nationwide Retirement Institute surveyed financial advisers and found that 93% support the legislation and believed it would benefit their clients.

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