This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Options for Investors Worried About the Future of the 60-40 Portfolio


Visit: Validea


Vice President at and Partner Validea Capital Management

The 60-40 portfolio just finished one of its best decades in history. And that comes on the back end of a period starting in 1980 that has seen it produce extremely strong returns. In hindsight, the fact that bond yields were very high at the beginning of the period and equity valuations were fairly cheap indicated the portfolio was likely to have strong returns going forward, but I don’t think anyone expected the types of returns we have gotten.

But if we apply the same logic today that we did in hindsight to 1980, things look a lot worse. Bond yields are currently very low relative to history and equity valuations are very high. The dual forces that the 60-40 had at its back in 1980 are now both significant headwinds.

Outlining the potential future problems for the 60-40 is the easy part, though. I am certainly not breaking any ground that many other people haven’t already by talking about its lower potential future returns. The more challenging part for investors is figuring out what to do about it.

The answer to that question is one that is specific to each investor’s circumstances, so if you are looking for the one option that solves the future problems of the 60-40, I won’t be able to provide it here. But I do think that it is a worthwhile exercise to look at the options available and to consider their merits.

But before I talk about some options worth considering, I think it is first important to cover one that I think is less than ideal, but that also has probably been the most popular option thus far. That option is moving up the risk curve. With this option, investors have just been dealing with the problem of lower returns by just investing in riskier and riskier assets. For example, an investor in high grade corporate bonds might move to junk bonds to get a higher yield. Or an index investor may move from the S&P 500 to a higher-octane growth portfolio. Or a growth investor might graduate to cryptocurrencies. These options have worked so far, but the thing about risk is that it always eventually materializes in volatility and drawdowns. So dealing with lower future returns by increasing risk is a solution that is filled with potential problems.

Now that we have taken that option off the table, here are some other potential investment options that could help deal with the potential lower future returns of the 60-40 portfolio.

[1] The 60-40 Portfolio 

Ok, now you probably think I am crazy. How could an investor possibly deal with lower potential returns from the 60-40 portfolio in the future by investing in it? The obvious answer is they can’t. But many people (myself included) have been talking about lower expected returns for the portfolio for a long time, and they haven’t materialized yet. The reason for that gets back to the nature of expected returns. Expected returns are meant as a guide to the future long-term returns of an asset class. They tell us very little about what might happen in the next year, or even the next several. So altering a portfolio based on them requires significant patience and ability to endure tracking error. For many investors, that is too much. When you combine that with the fact that the 60-40 has been a solid portfolio for long-term investors, the best answer for many to this problem may be doing absolutely nothing, while also understanding that returns may be lower in the future and planning for that potential reality.

[2] Making Adjustments Around the Edges

Although stocks in general are certainly expensive, there are areas of the market that look more attractive on a relative basis. We recently interviewed Ben Inker of GMO for our podcast (the interview will air next week) and he highlighted the potential opportunity in US value stocks and in markets outside the US. Prudently shifting a portion of a portfolio to areas that have higher expected returns can help to boost future returns. But those higher expected returns come with potential higher volatility and the risk that those bets won’t pay off, so sizing them relative to an investor’s ability to endure risk and tracking error is key.

[3] Introduce Uncorrelated Asset Classes

Another option many investors have considered, especially given the possibility that we will see inflation in the future, which could make stocks and bonds go down together, is introducing other asset classes such as gold and commodities into their portfolios. Others have invested in more advanced strategies like CTAs and global macro strategies that seek consistent positive returns regardless of the market environment. These alternatives could potentially add significant value if stocks and bonds falter (particularly if we do see the inflation many have predicted), but they come with the risk that they will continue to underperform the standard 60-40 and detract from returns as they have in the past decade.

[4] Use More Advanced Approaches

For investors who can endure the risk of looking different than the market, there are some interesting strategies that are worthy of consideration. For example, risk parity invests in a wide variety of asset classes and weights them such that they contribute an equal amount of risk to a portfolio. This can lead to a more efficient portfolio and more consistent returns. This used to only be available to more sophisticated investors, but there is now an ETF that follows the strategy.

We have also found some interesting quantitative approaches that use momentum to maintain exposure to the asset classes that are performing best. We discussed Protective Asset Allocation and Generalized Protective Momentum, which are two examples of those types of strategies, on this episode of our Excess Returns podcast.

One of the problems with these types of approaches is that they look very different than the market and will likely underperform in bull market periods. This can make them hard to stick with. Corey Hoffstein and Rodrigo Gordillo recently appeared on our podcast to discuss their paper “Return Stacking: Strategies For Overcoming a Low Return Environment”, which offers a very interesting way to deal with that problem. I will write more about this concept in a future article, so I won’t go into detail about it now, but the general idea is that there are currently products available (like WisdomTree’s US Efficient Core Fund – NTSX) that allow investors to maintain 100% exposure to a 60-40 portfolio through the prudent use of leverage without investing 100% of their capital in the strategy. This allows other return streams to be “stacked” on top of the 60-40 portfolio. This can both boost returns and reduce tracking error for non-conventional strategies because it maintains the core exposure to the 60-40.

A Problem Without a Simple Solution

Although I am a believer that the future returns of stocks and bonds are likely to be lower than what we have seen in recent decades, what, if anything, investors should do about that is a very challenging issue. For many investors, maintaining their current strategy and accepting the likelihood of lower potential returns very well may be the best answer. But for those who are willing to look different, there are some very interesting alternatives that are available. It is just important to keep in mind that any investing strategy is only as good as the ability of the investor who is following it to stick with it. So investing in a strategy that deviates from the 60-40 requires the ability to stay the course when those deviations work against you.

Originally Posted on September 22, 2021 – Options for Investors Worried About the Future of the 60-40 Portfolio

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Validea and is being posted with permission from Validea. The views expressed in this material are solely those of the author and/or Validea and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Complex or Leveraged Exchange-Traded Products

Complex or Leveraged Exchange-Traded Products are complicated instruments that should only be used by sophisticated investors who fully understand the terms, investment strategy, and risks associated with the products.  Learn more about the risks here:

Disclosure: Digital Assets

Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses. Eligibility to trade in digital asset products may vary based on jurisdiction.

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at

trading top