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Is the 60/40 rule still good advice for your retirement investments?
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Is the 60/40 rule still good advice for your retirement investments?

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The 60/40 rule is a fundamental principle of investing. They say you should aim to keep 60% of your holdings in stocks and 40% in bonds.

Stocks can have robust returns, but they are volatile. Bonds offer modest but steady income and serve as a buffer when stock prices fall.

The 60/40 rule is one of the most well-known principles in personal finance. However, not long ago, much of the investment community left her.

A chorus of essays and think pieces in 2023 and early 2024 asked whether the 60/40 portfolio he was deadexplained why it might not be anymore quite good to support a balanced portfolio and offered investment alternatives.

The reason: 2022. Bonds suffered one of their toughest years ever, hit by the one-two punch of spiraling inflation and rising interest rates.

However, as 2024 draws to a close, investors are warming to 60/40 again.

Should investors still follow the 60/40 rule?

One recent reportinvestment firm Vanguard reaffirmed the 60/40 as “an excellent starting place for long-term investors, and that is as true today as at any time in history.”

Other investment experts agree.

“Sixty-forty is still a good benchmark for a balanced portfolio,” said Jonathan Lee, senior portfolio manager at US Bank.

And Todd Jablonski, global head of multi-asset investing for Principal Asset Management, thinks the 60/40 rule is “very alive. I could do a few Mark Twain is jokinghe said.

The 60/40 rule comes from common wisdom, which dictates that an investment portfolio should be balanced, especially as we approach retirement.

Stocks can offer returns of about 10% per yeara much higher rate than an investor is likely to reap in a regular bank account. But the stock market is mercurial and in a recession it can go down.

Bonds are supposed to be safe, predictable, boring: the perfect foil for stocks. When stocks go down, bonds go up, at least in theory.

“Boring” bonds have gone wild in 2022

The events of 2022, however, seemed to answer the market. Stocks lost 18.6% of their value, as measured by the S&P 500. And bonds lost 13.7% of their value, according to the Vanguard Total Bond Market Index. Adjusted for inflation, it was the weakest bond return in 97 years, according to a NASDAQ analysis.

The bond bloodbath has some investors wondering if it’s time rewrite the rules of saving for retirementstarting with the 60/40 rule.

Here’s why bonds fell: In 2022, the Federal Reserve embarked on a dramatic campaign ofinteresttraces in response toinflationwhich reached a maximum in the last 40 years.

That was bad for bonds. Bond funds tend to lose value when interest rates rise and when inflation rises.

Rising interest rates tend to raise new bond yields. This makes older bonds less attractive because they have lower yields. This cycle pushes down the value of bond funds.

Rising inflation also makes bonds less attractive because it erodes their value. If a bond pays 4% interest and inflation reaches 5%, then the bond’s effective rate of return is negative.

Even before 2022, bonds weren’t doing too well. Interest rates have remained at historic lows for much of the post-2008 period following the Great Recession and later the covid pandemic. Investors generally make less money on bonds when interest rates are low.

“I think investors are starting to look at bonds and say, ‘How much lower can it go?'” Jablonski said.

The 60/40 landscape is different in 2024

Today, the link landscape looks very different. Inflation it was relieved. Interest rates are falling but still high, meaning new bonds are bringing solid returns.

And investors who follow the 60/40 rule do quite well.

In 2022, according to Jablonski’s calculations, the 60/40 portfolio lost 15.8%. But in 2023, the same portfolio grew by 17.7%. And this year, through November 6, the 60/40 investor is up 15.5%.

“It’s a pretty good level of return,” he said.

Even when you include the dismal 2022 numbers, Vanguard found, the 60/40 portfolio has earned 6.9% a year on average over the past 10 years.

“The last decade has been a strong one for the 60/40 because stocks,” meaning stocks, “have performed particularly well,” said Todd Schlanger, senior investment strategist at Vanguard and author of the October report.

Now, with the scholarship riding highinvestors should expect somewhat lower stock earnings in the coming years. By historical standards, the stock market is overrated.

As a result, “the returns for 60/40 are likely to be lower than in the last 10 years,” Schlanger said.

But don’t blame the bonds.

Bonds will “make a more significant contribution in the next 10 years than they did in the last 10 years,” Schlanger said.

The current yield on the benchmark 10-year Treasury bond is about 4.3% reports CNBC. The yield is the annual interest rate the investor receives over the term of the bond. And right now, yields are outpacing inflation.

“People are warming up to bonds because interest rates are higher than they used to be,” Lee said.

Bond yields are rising with the deficit

One reason bond yields are high, especially over the long term, is that investors are worried about the federal government’s growing debt.

The interest rate on a 10-year Treasury note rose to its level the highest level in recent monthsWednesday following news of Donald Trump’s election to a second term as president.

Trump campaigned on low taxes. Economists predict that Trump’s fiscal policy will increase the federal deficit, the gap between spending and revenue. The deficit remains to 1.8 trillion dollars.

“The market risk with Trump is an undisciplined fiscal situation. At some point in 2025, the deficit will take over the market narrative,” said James Camp, managing director of fixed income and strategic income at Eagle Asset Management in St. Petersburg, Florida, speaking to Reuters.

Bond yields are rising at least in part because investors sense a greater risk of the government living beyond its means, Jablonski said.

And therein lies another cardinal rule of finance: a less creditworthy debtor must pay higher interest, even if it is the government.