| The idea of the 60/40 portfolio was born over 70 years ago in the 1950s when Harry Markowitz, an economist and professor, began pioneering the idea of the modern portfolio theory (MPT). The concept says that a portfolio's asset mix should be optimized for the greatest expected return given a level of risk and that investors should hold uncorrelated assets to minimize that risk. In layman's terms — diversification within your portfolio is key. Subsequently, the 60/40 (stocks to bond ratio) portfolio was created as a standard way to invest. Given the exceptionally weird times we're in now though, some big players are betting on a big shift in the 60/40 allocation this year. What's happening to the 60/40? - It's important to mention that the 60/40 portfolio is simply an outline — a guide — not an exact science. While it does suggest that mid-aged/moderate-risk investors hold roughly 60% stocks and 40% bonds, it doesn't specify exactly which stocks or which bonds should be held.
- Historically speaking, the prototypical model of the 60/40 which holds something like $VTI and $BND has earned investors an annual average return of 7.87% going back 3 decades. As you may guess, the portfolio's best and worst years often coincide with the stock market's movement overall, and 2022 was one of its worst years on record — losing 16%.
- Recent years: However, that return has been boosted if we zoom in. Since the financial crisis 14 years back, the portfolio has returned 11.5% per year on average. Since 1980, there have been 9 occasions where the 60/40 dropped more than 10% in a given year (one of which was last year). In 5 of those years, the portfolio ended the year green, and returns were positive in 8/9 years following that slump, with an average return of +17%.
- As for 2023: 2022 was an abnormally bad year for the 60/40 as bonds didn't hold up their hedging end of the bargain, but in 2023 that's expected to flip. The bond market's plummet means that yields are now at a high point, and investors are piling in to take advantage.
- Playing it: Yields are becoming so lucrative that some firms like BlackRock are suggesting only a 35% allocation to stocks with a 65% nod to bonds. It's valiant to assume such lofty performance from bonds, but there's no denying their rebound. Thus far, both stocks and bonds are off to a great start for the year.
Going forward There's never a perfect one size fits all approach to investing, but these guidelines like the 60/40 rule of thumb have proven to be a great ideological starting point. Opinions regarding 2023's deviation in the proper allocations here are yet another example of how things change over time. Take this related lesson on this topic and earn Dibs 🟡 while you're at it: | 
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