60/40 Portfolio | Don’t Give Up, Don’t Ever Give Up – Jim Valvano

As of this writing, December 9th, the typical 60% Stocks and 40% Bonds portfolio was down almost -15% year to date in 2022. This makes 2022, one of the worst 5 years for a “balanced” portfolio like this. Here’s a chart from Lombard Odier, showing how bad and rare 2022 has been for this well-known retirement planning strategy. How bad was the loss sustained by 60/40 through Q3 2022? Looking at calendar year returns dating back to the mid-1920s, the loss ranks second all-time. For the first 3 quarters of 2022, the losses experienced in the traditional balanced portfolio were greater than any year since 1931.

Jim Valvano

I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group, and those who know me know I am a huge college basketball fan. ACC all the way. With the holidays quickly approaching, I want to leave my viewers with a holiday gift. I’m going to combine a little stock market history with one of the most moving and inspirational speeches I have ever heard in my life. The speech was given by legendary N.C. State men’s head basketball coach, Jim Valvano. It was his speech at the 1993 ESPY awards.

He was accepting the Arthur Ashe award for courage, as Jimmy V was in the late stage of his life, fighting cancer. This speech is better known as the “Don’t give up.. Don’t ever Give up” speech and is used at this time of the year to promote Cancer fundraising for research. I’ll put a link to the speech in the description below. A warning, have Kleenex handy. It will put life in perspective.

“Don’t give up, don’t ever give up.” Those are Jim Valvano’s words of determination, and those are fighting words. Clearly, my job here as CIO of Oak Harvest isn’t as important as someone’s fight against cancer. Not a chance. It isn’t. However, after a volatile and negative year in the financial markets, and for sure, 2022 has been a trying year across both stocks and bonds, many retirees and near-retirees might feel like its just time to give up and pull the plug, particularly on their 60/40 allocation, and go to cash.

I’m here to dissuade you from this and message that it’s probably a better chance now to allocate more to 60/40 for almost anyone, regardless of retirement age, than it has been in a couple of decades. Here are the annual returns from a 60/40 portfolio going back 94 years to 1928. The data table includes the year’s stock return, the bond component, and then the 60/40 blended return.

Looking at the table, most of the worst years for a 60/40 portfolio are the same as the worst years for the U.S. stock market. This makes sense since the 60% stocks carry much more risk and volatility than the 40% bonds. The rarity of 2022 was that both stock and bond market returns were very negative.

Bonds usually provide stability in a portfolio. They didn’t year to date. Bonds did NOT produce any ballast and help “balance” what is supposed to be a balanced, in a lower volatility 60/40 strategy. And as of this table being printed on October 31st, the bad returns in stocks and bonds were almost exactly the same negative return. About -18% each back then near the lows in stocks and highs in Treasury yields! This was the 2nd worst balanced 60/40 portfolio performance over the last 90+ years. Only 1931, which was during the Great Depression, was worse.


Free photo stock market broker working with charts of global currency data


Sell it, sell it all. Call your advisor and dump it. Many strategists on TV are now parroting for you to “Scrap the 60/40 strategy “. I disagree. Now don’t get me wrong, it’s been a dog this year. But that’s large because the bond component didn’t provide stability. Bond prices decline as yields rise. During the Covid swoon, the Federal Reserve suppressed interest rates to stimulate the economy.

Yields during Covid paid you almost nothing, say, 2 to 3% in 2020 and 2021. Now those bonds are yielding 4 to 9% now, depending on the maturities and credit quality of the 40% bonds you might be allocated to. But you’ve taken a beating this year as yields rose, the price of your bonds declined as they are inversely correlated over shorter holding periods.

Don’t blow it all out. Why, you ask? Because investing is about longer-term expected returns and the longer-term data for a 60/40 portfolio looks better now that interest rates have finally risen off the mat. Take a look at the table for 5-year returns of a 60/40 portfolio. On only four occasions over the last 94 years was a 60/40 portfolio negative over five years, and 3 of the time periods were during the Great Depression.

Longer term? Ten-year returns? What do they look like? The 60/40 portfolio has never had a negative 10-year nominal return. That’s impressive. And even with how bad 2022 has been. As of December 8th, with the 60/40 benchmark down -14.75% YTD, and the max drawdown for the year being October 13th, down almost -22%, the 10-year return of a 60/40 portfolio remains. Over 8% per year.

If ten years ago, exiting the Great Financial crisis, someone told you as an investor, that you would average over a positive 8% return per year being only 60% invested in stocks? And 40% bonds? Including having a -35% drawdown in your stocks in year eight and -11% in bonds, and -17.5% in stocks in year 10? I would think most investors would be happy. If you weren’t, you are unrealistic and have unrealistic expectations about investing in the public markets.

If you want to extend the holding period to 20 years, the annual return of the worst 20 years averaged between a positive 3.5% and 6% gain annually. 3.5% to 6% positive returns per year, including the Great Financial Crisis and the Dot.com Bubble crashing? Still seems like an impressive annual return. Moreover, the strategy bested inflation over that period. Past performance is no guarantee of future returns, of course. That usual disclaimer applies, but in investing, not trading, it’s often best to zoom out when you’ve had a bad year. Extend your time horizon. Look at the forest and not the trees, and “don’t give up.. don’t ever give up”.

2022 has been the most challenging investment environment for owners of both stocks, and bonds, or owners of both, in decades. The 60/40 balanced retirement portfolio has experienced losses not seen since 1931. But our OHFG investment team sees reason for optimism, looking at expected forward returns for this strategy.

Data provided by Chris Galipeau, Senior Market Strategist at Putnam Investments, shows that when both stocks and bonds are trading below their 3-year moving average, as they were in October, the average forward one-year return of 60/40 portfolio has been +19%. In addition, the forward return has been positive 100% of the time. It has been ten for ten.

While the future is always uncertain in investing, history says that now could be an attractive time to once again consider a traditional 60/40 portfolio or, if you are already invested in this strategy, add to your existing positions in this long-term strategy.
Our investment team recommends that you get on the phone and give our Oak Harvest concierge team a call and ask to speak to one of our financial advisors and planners.

Set up a meeting and sit down with our team and let us walk you through your retirement plan. Give us a call at (877) 896-0040 and give our financial planning team a chance to model your cash needs, and maybe a few of your greed’s too, into and through your retirement years.

I’m Chris Perras, CIO at Oak harvest and from the whole team here, have a great holiday season and I hope each and every one of you get a chance this holiday season to laugh, to think, and have your emotions move you to tears with your friends and your family.