Is the 60/40 portfolio dead?

Michael Devereux, Multi Asset Portfolio Manager at Schroders

The idea behind the 60/40 portfolio, which is made up of 60% equities and 40% bonds, relies on the negative correlation between equities and bonds. In others words, if the equity component of the portfolio does poorly, these losses would be offset by gains from the bond component, and vice-versa.

However, the correlation between equities and bonds turned positive in 2022 which meant that the 60/40 didn’t provide the protection it has been known for since the 1990s. Instead, as equities fell over the year, so did bonds. A portfolio made up of 60% US equities and 40% long-term US government bonds, fell 17% last year (Fig. 1), underperforming both South African and US inflation by roughly 21.6%.

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