Every few years, someone writes the obituary for the 60/40 stock/bond portfolio. Rates are too low, so bonds can’t do their job. Rates are rising, so bonds get crushed. Stocks fall substantially; they’re never coming back. Stocks and bonds are correlated now, so the diversification is gone. You know the narratives by now. But then a few years pass, the 60/40 does roughly what it’s always done, and the obituary quietly gets filed away until the next time the narrative seems to work.
The problem here isn’t that 60/40 has died or can’t perform well in the future. The problem is we treat 60/40 as the benchmark for everything, and it cannot serve as an everything portfolio. That is a temporal problem, not an inherent flaw in the instrument. Investors keep declaring 60/40 dead because it’s a portfolio that cannot serve all of your life’s goals. And that’s just a flaw in the way we’re benchmarking it and using it in our financial plans.
What a 60/40 Actually Is
In the Defined Duration framework, we try to think about every asset in terms of time. Financial planning isn’t a performance competition. We don’t judge every instrument on how it did last year or how it might do next year, but on the time horizon over which it reliably does what we need it to do. A T-Bill has a duration of a few months. A short-term government bond fund has a duration of a few years. The stock market, on the other hand, has a very long duration because it can go through long stretches where it doesn’t deliver a positive real return. When you judge assets over the right time horizons, you not only improve your own behavior, but you allow the assets to perform better over the time horizons in which they serve your financial planning needs.
When you blend 60% stocks with 40% bonds, you get something that isn’t the long time horizon of stocks, but also isn’t the shorter time horizon of bonds. In our work, a 60/40 portfolio behaves a lot like a 10 to 15 year instrument. Over that kind of window, it has historically done a pretty good job of growing in real terms. Over a one or two year window? It’s a coin flip with a decent chance of an ugly result. 2020 and 2022 were good reminders of that. Stocks and bonds fell together, and a lot of people who thought they owned the “balanced” portfolio were genuinely surprised by how unbalanced its performance can be.
But here’s the thing. If you understood the 60/40 as a 10 to 15 year instrument, a bad year shouldn’t surprise you at all. Judging 60/40 over one year is like buying a 1-year T-Bill and then getting upset that its price hasn’t moved much after 1 month. That’s not the instrument failing. That’s the instrument being judged on the wrong time horizon.
The Benchmark Is the Real Flaw
The financial industry loves a single number. One portfolio, one benchmark, one return. It’s simple, and it’s easy to market. And the 60/40 became the default benchmark for the “balanced” investor because it sits in the middle of everything.
The problem is that real people don’t have one time horizon. We all have a bunch of time horizons. A retiree might need cash for next year’s living expenses, money for a new roof in four years, funds to cover long term care risk in their 80s, and a pool of money they’ll probably leave to their kids. Those are completely different liabilities with completely different time horizons. Asking a single 10-15 year instrument to fund all of them is asking it to do something it was never designed to do.
Think about what this means in practice. If 60/40 is your entire allocation, then the money you need next year is sitting in a portfolio that could easily be down 20%+ next year. That’s sequence risk, and it’s the thing that actually ruins retirements. More importantly, where did that allocation even come from? If most of your liabilities are very long-term then 60% equities might be too little risk. 60% isn’t a precise planning figure. It’s a backtested generalization that seems to work in a vague context. In choosing this vaguely “balanced” allocation, you’ve managed to choose a portfolio that is both too risky as well as being not risky enough because it’s trying to solve for all time horizons when it reliably only solves for a 10-15 year time horizon. This is a benchmarking and financial planning problem, not a structural flaw in the instrument itself.
Put the 60/40 Where It Belongs
The fix isn’t to throw out the 60/40. It’s to put it in its proper place. After all, your financial plan isn’t an asset optimization problem. It’s an asset-liability matching problem. What do you need, and when do you need it? When you know the answer to that question, you can match assets to those time horizons, and then time becomes the only benchmark that matters. I like to think about this in four buckets that can then be designed in a more granular manner:
0 to 3 years: T-bills and short-term bonds. This is money you can’t afford to see drop, so it shouldn’t be exposed to much market risk at all.
3 to 7 years: Short and intermediate bonds, TIPS, and very conservative multi-asset instruments.
7 to 15 years: This is where the 60/40 lives. It’s a terrific instrument for this window because it has enough equity exposure to grow and enough bond exposure to smooth out the ride. Its probability of positive real returns is very high over these time horizons.
15+ years: Equities. Money with this kind of runway can afford to ride out the long and sometimes painful stretches that stocks go through.
When you look at it this way, the 60/40 isn’t the whole portfolio. It’s one piece of a temporally structured plan. And once it’s only responsible for the money that actually matches its time horizon, a lot of the complaints about it go away. A bad year in the 60/40 doesn’t force anyone to sell at the bottom because next year’s spending is already sitting in T-Bills. The 60/40 gets to do its job on its own timeline, and the investor who declares it “dead” is falling for the short-termism that kills so many portfolios.
Stop Asking One Portfolio To Do Everything
I think the 60/40 debate has been framed wrong for decades. People keep asking whether it’s the right portfolio. That’s the wrong question. The right question is “the right portfolio for what?”
A portfolio is just a tool. And like any tool, it’s only good or bad relative to the job you’re asking it to do. The 60/40 is a perfectly good tool for a 10 to 15 year job. It’s a lousy tool for next year’s grocery bill, and it’s a bit of an underachiever for money you’ll pass on to your grandkids. None of that is a flaw in the portfolio. It’s a flaw in how we’ve been benchmarking it.
So let’s stop writing the obituary. The 60/40 isn’t dead. It just needs a better job description.
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