October 2022 – By Kyle Rohrwasser
Just in time for Halloween, the 60-40 portfolio model has risen from the grave in just a few short months. A 60/40 portfolio has long been an industry standard, representing 60% equities with a ballast of 40% fixed income. Between October of 2018 and August 2020, we saw 10-year treasury rates drastically move down from 3.23% to 0.55%. That created a paradigm shift towards equity over fixed income. Fixed income prices move in the opposite direction of their yields. As yields drop, prices increase, and vice versa. This inverse relationship is known as Interest Rate Risk and is measured by a data point known as duration. During the summer of 2020, with fixed income yields pressed lower, adding interest rate risk almost guaranteed losses in the event the Federal Reserve increased interest rates. This had some analysts claiming the 60/40 portfolio was dead, as the ‘safe’ portion of the portfolio (fixed income) carried a high degree of interest rate risk while simultaneously paying very little yield. This dynamic caused many investors to allocate even more to equities to compensate for the poor fundamentals within the fixed income market.
Fast forward to 2022, and the Fed has increased interest rates aggressively, resulting in deeply negative returns for fixed income. With this newfound rate level pushed on us by the Federal Reserve’s fight against inflation, it has resurrected the 60-40 portfolio. With the 10-year treasury at 4.2% and the notion that the Fed may be nearing an end to their rate hikes, investors are reconsidering fixed income, and finding validity in the 60/40 portfolio once again. For example, a $1M portfolio split 60-40 in August 2020 was only yielding about $2,250 in annual interest, whereas now that same portfolio is yielding $17,000 in annual interest now.
Interest rate risk is also decreasing. With rates near zero, interest rate risk was higher than ever, as rates could only go up from there. With the Fed Funds rate settling in well above zero, stimulative rate decreases are once again in the Fed’s toolbox. The Fed has signaled that they believe they are closer to the end of this hiking campaign than the beginning and may even pause the hikes in 2023 to see if they’re having the desired effect of cooling off inflation. While a pause will likely be viewed favorably by equities and fixed income alike, it is hard to deny the potential opportunity that has re-emerged for fixed income, and the 60/40 portfolio.
We firmly believe that maintaining a well-diversified long-term approach is the best method towards long term, risk adjusted returns. Even more so now with the amount of market and economic uncertainty in the near future.
This material is for informational purposes only. It is not a recommendation or solicitation to buy or sell any securities. Vantage Financial is not a tax advisor; please consult your tax advisor prior to making any investment decisions. Vantage Financial is an Investment Advisory Firm registered with the Securities and Exchange Commission (“SEC”). SEC registration does not imply any particular level of skill or expertise.