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- The classic investment strategy of 60% stocks and 40% bonds has had a dismal year, and many predict its demise.
- But Goldman Sachs Asset Management says it could come back in 2023, going by past patterns.
- Attractive bond yields could add to the portfolio’s appeal, according to the $2 trillion asset manager.
The classic 60/40 investment portfolio is headed for one of its worst years ever, prompting many a market commentator to predict its imminent demise.
Not so fast, according to Goldman Sachs Asset Management.
The traditional investment model — a combination of 60% stocks and 40% bonds — could make a comeback in 2023, the US money manager said in a recent note. That’s when the sharp surge in bond yields over the past two years could boost portfolio returns and compensate for continued interest-rate volatility.
Furthermore, history shows the 60/40 portfolio tends to deliver strong returns in the years immediately following a period of negative returns, Goldman Sachs Asset Management said in its note.
“Performance for an illustrative traditional 60/40 portfolio has been challenged in 2022 amid surges in interest rates, recession risk, and broader market uncertainty,” it said.
“However, past instances of 60/40 drawdowns have delivered strong performance in subsequent calendar years.
“We believe 2023 may be able to deliver a similar rebound, as attractive yields across the fixed income universe may offset rate market volatility.”
An illustrative 60/40 portfolio has suffered losses of around 12% so far this year, on track for the biggest annual negative returns since 2008, according to the money manager, which oversees more than $2 trillion in assets.
Historical pattern
The model previously saw declines in 2018, 2008 and 2002. Each time, it delivered a strong rebound during the following year — 22.4% in 2019, 18.2% in 2009 and 18.8% in 2003.
Should that pattern repeat, it would mean a much better year ahead for the investing strategy.
The outlook for the 60/40 portfolio has also brightened due to increased bond yields, according to Goldman Sachs Asset Management.
Fixed-income yields have surged over the past two years as inflation accelerated, forcing the Federal Reserve to raise interest rates aggressively. The yield on the benchmark 10-year US Treasury has climbed about 320 basis points from the lows reached in the first quarter of 2020, to around 3.50%.
Goldman Sachs isn’t the only money manager that finds bonds attractive now.
“We are more excited about bonds than we have been in over a decade,” strategists at JP Morgan Asset Management led by Karen Ward wrote in a recent report. “Looking forward, it’s clear that the income on offer from bonds is far more enticing.”
