60/40 Portfolio

The 60/40 portfolio allocates 60% to equities and 40% to bonds (typically U.S. Treasuries or aggregate bonds). It has been the default benchmark for balanced portfolios for decades, underpinned by the assumption that bonds provide both income and diversification against equity drawdowns.

The diversification logic:

• When equities sell off due to growth fears, the Fed typically eases, driving bond prices up
• Bonds offset equity losses, reducing portfolio volatility
• The combined portfolio achieves a better risk-adjusted return than either asset class alone

This works only when the stock-bond correlation is negative, which has been the case for most of the period since 2000 but was not the case before 1998 or during parts of 2022.

The blog series "Monthly 60/40 Equilibrium" tracks how the equilibrium weight (the weight that would have minimized trailing volatility) drifts over time. Key findings:

• The equilibrium equity weight varies from ~40% to ~80% depending on the correlation regime
• During 2022, stocks and bonds fell simultaneously, producing the worst year for 60/40 since the 1970s
• The blog posts "Adding Resilience to 60-40 Portfolios" and "Diversifying Return Stacked Allocations" analyze how to improve on the basic 60/40 with alternative allocations

The 60/40 portfolio remains the starting point for most institutional allocations, but its performance is directly tied to the yield curve environment and the prevailing correlation regime.