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The 60/40 investment strategy — where 60% of your portfolio is allocated to stocks and 40% to bonds — has been a cornerstone of retirement planning for decades. It’s based on the idea of balancing growth (from stocks) with stability (from bonds), giving investors a way to capture market returns while managing risk. However, after a difficult year for bonds in 2022, many people began questioning whether this traditional rule still makes sense in today’s market.

With 2024 on the horizon, is the 60/40 portfolio still a viable option for retirement savers, or is it time to rethink your strategy?

The Basics of the 60/40 Rule

At its core, the 60/40 rule is a balanced approach to investing. Stocks are known for their potential for high returns — typically around 10% annually over the long term — but they can also be volatile. Bonds, on the other hand, are generally seen as safer investments that provide regular income and can help cushion the blow when the stock market takes a downturn.

The strategy works by blending the growth potential of stocks with the income stability of bonds, making it an appealing option, especially for those nearing retirement who want to reduce the overall risk in their portfolio.

The Setback of 2022

2022 was a tough year for both stocks and bonds, and it raised doubts about the effectiveness of the 60/40 rule. The S&P 500 index, which tracks the performance of 500 major U.S. companies, lost 18.6% of its value. Meanwhile, bonds also struggled, with the Vanguard Total Bond Market Index declining by 13.7%. For bonds, it was the worst performance in nearly a century.

What caused this? Rising inflation and aggressive interest rate hikes by the Federal Reserve. Typically, when interest rates go up, bond prices fall, as newer bonds offer higher yields and make existing ones less attractive. This left many questioning whether bonds, once a reliable source of stability, could still be trusted to provide the ballast needed in a balanced portfolio.

Is the 60/40 Strategy Still Alive?

Despite the challenges faced by bonds in 2022, many experts still believe that the 60/40 strategy is far from dead. In fact, they argue that it remains a solid approach for long-term investors, especially in a world where inflation is cooling and interest rates are stabilizing.

Jonathan Lee, senior portfolio manager at U.S. Bank, states that the 60/40 allocation remains a good starting point for building a balanced investment portfolio. “It’s a great benchmark for a diversified portfolio,” he says, adding that it continues to work well for investors looking for a mix of growth and stability.

Similarly, Todd Jablonski, head of multi-asset investing at Principal Asset Management, believes the 60/40 rule is “very much alive.” He jokes, “I could make some Mark Twain references here,” referring to Twain’s famous quote about rumors of his death being greatly exaggerated.

Why Bonds Are Gaining Appeal Again

2024 has brought a very different market environment, and bonds are once again showing promise. While inflation remains a concern, it has eased compared to the heights it reached in 2022, and interest rates — though still elevated — are starting to come down. These changes have improved the yield on new bonds, making them a more attractive option for investors.

For example, in 2023, a 60/40 portfolio gained 17.7%, and in 2024, the same portfolio was up 15.5% as of early November. Even with the negative returns from 2022, this is a solid rebound for the strategy.

According to Vanguard’s analysis, even when including the poor performance of 2022, the 60/40 portfolio has delivered an average annual return of 6.9% over the past decade. The strong returns in the stock market over the last 10 years have helped drive these gains. However, experts caution that stock market returns may be lower going forward, given the current high valuations.

Todd Schlanger, senior investment strategist at Vanguard, notes that while stocks may underperform in the coming years, bonds will likely play a more significant role in the portfolio going forward. “Bonds will contribute more meaningfully in the next decade than they did in the last one,” Schlanger says.

The Rise in Bond Yields

One key factor that is benefiting bonds right now is the rise in yields. The 10-year U.S. Treasury bond yield, for instance, is currently around 4.3%. This is much higher than the ultra-low yields seen in the years following the 2008 financial crisis and the COVID-19 pandemic.

For investors, this increase in yields means that bonds are providing better returns, making them an attractive option once again. As Jonathan Lee explains, “People are starting to warm up to bonds because interest rates are higher than they used to be.”

What’s Driving Higher Bond Yields?

One of the reasons bond yields are higher right now is due to concerns about the federal government’s growing debt. As the U.S. government runs higher deficits, investors are demanding higher yields to compensate for the perceived risk.

This dynamic has led to higher interest rates, especially on long-term bonds. In fact, the yield on a 10-year Treasury note recently hit its highest level in months, partly due to concerns about future government spending under potential changes in fiscal policy. If these concerns persist, bond yields could stay elevated, making bonds a more attractive option for retirement savers.

Should You Stick with the 60/40 Rule?

Despite the volatility of recent years, the 60/40 rule remains a viable strategy for retirement planning. It continues to offer a balanced approach to managing risk and generating growth, especially as the bond market recovers and interest rates stabilize.

For those in or near retirement, the 60/40 strategy can be particularly appealing because it helps provide both income and protection against market fluctuations. While stock returns may moderate in the years to come, bonds will likely play an increasingly important role in delivering steady income and preserving capital.

Final Thoughts

The 60/40 portfolio may not have the same level of performance it enjoyed during the bull market of the last decade, but it’s far from obsolete. As bond yields rise and inflation slows, the strategy is regaining its footing, offering a balanced solution for long-term investors.

In the current market, it’s likely that stocks and bonds will both contribute to portfolio returns, but bonds may offer more of a stable foundation for the years ahead. While no investment strategy is guaranteed, the 60/40 rule remains a reliable and time-tested approach for investors seeking to strike a balance between growth and security in their retirement accounts.