February 5, 2023

Unusual conditions in 2022 have rocked a long-cherished investment strategy.
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Every investor has to decide how much risk he or she is willing to take on.
If you are a daredevil in search of large returns, you might put all your money in stocks, despite the potential risk of losses. If you are a bit more cautious, perhaps you would protect yourself by splitting money between stocks and a healthy dollop of bonds.
This latter strategy is supposed to give you some downside protection when markets tumble. However, in today’s bear market, it’s not working out that way.
As of Sept. 19, the Vanguard S&P 500 Index Fund (VFIAX) — which is invested 100% in stocks — has recorded a year-to-date loss of 17.26%.
Meanwhile, the Vanguard Balanced Index Fund (VBIZX) — roughly divided into a split of 60% stocks and 40% bonds — has fared better, but not by much. It is down 15.88% in 2022.
That is not exactly the type of protection cautious investors expect when using a balanced fund.
The sluggish performance is particularly galling in light of the fact that investing in a balanced fund means you often sacrifice the potential for much bigger gains during a bull market.
For example, last year, the S&P 500 Index Fund surged a whopping 28.66% — more than double the gain of the Balanced Fund, which rose 14.22%.
So why is such a conservative mixture letting down investors so badly in 2022?
History suggests that when stocks plunge, bonds are likely to hold their value, providing some ballast that can help you sail through stormy market waters. But 2022 has not been like most past years.
For one thing, inflation is at a four-decade high. For another, the Federal Reserve is quickly pushing interest rates higher in an attempt to slow the economy and bring down rising prices. Those two factors have taken an unusual toll on both stocks and bonds, as CNBC pointed out earlier this summer.
That means that as stocks and bonds are plunging in unison, so is your 60/40 portfolio.
So should you give up on a balanced portfolio, switch to all stocks and hope for the best going forward?
Probably not. Writing for MarketWatch, financial writer Mark Hulbert points out that balanced portfolios have fared poorly at times in the past, so this is nothing new.
Still, in most years, the 60/40 portfolio performs as advertised, delivering downside protection in bad markets and healthy returns during good times. As Hulbert writes:
“Think of it this way: The 60%/40% portfolio’s handsome long-term returns are compensation for the risk that you’ll suffer a year like 2022. Hoping to capture those returns while avoiding their inherent risk is magical thinking, akin to wanting something for nothing. With what you’re feeling right now you are paying your dues.”
Want another take on the 60/40 portfolio? Money Talks News founder Stacy Johnson offered his insights earlier this year in the podcast “The 60/40 Investment Mix Is Dead – or Is It?
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.
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