The 'Everything Crash' Could Set Up a Two-Year Rally

The demise of the 60/40 portfolio is overexaggerated...

Last year, stocks and bonds crashed in unison – something we don't usually see. And the typical "balanced" portfolio of 60% stocks and 40% bonds had one of its worst years on record as a result.

It dropped more than 15% in 2022. A lot of folks think this strategy is dead going forward.

They're wrong, though. The decline isn't something to fear...

This strategy has seen similar losses five other times. And those cases proved to be great opportunities to buy stocks...

The 60/40 portfolio is a simple concept. You get the high growth potential of stocks, while shielding yourself from major losses through more conservative bonds. This popular investment strategy relies on the fact that the stock market and the bond market rarely see big drawdowns at the same time.

But last year, investors felt the unlikely pain of a down year for both stocks and bonds. The combined losses of the S&P 500 Index and the U.S. 10-year Treasury bond came out to a real loss of 23.6%.

A "real" loss (or gain) accounts for the effects of inflation. In other words, higher inflation reduces the value of your gains and makes losses cut deeper.

Only 1974 – another year plagued by high inflation – recorded a worse real loss. The 60/40 portfolio saw a real loss of 24.1% that year.

In total, we've seen real losses of more than 15% just five other times in the past 94 years. Take a look...

Last year was devastating. But hope is not lost...

Instead, history shows us that future gains are likely. Let's look at what happened after the other five years when a 60/40 portfolio suffered a real loss greater than 15%...

Impressively, in the two years after these cases, the market returned a total of 36.6% (or 18.3% annualized). Plus, stocks were up 100% of the time.

Within one year, the market had an 80% success rate with a return of 15.6%. That's nearly double the 9.1% average yearly return of the S&P 500 since 1928.

So, what is this telling us?

The future looks a lot brighter for investors... And the 60/40 portfolio strategy isn't "dead."

A solid, diversified portfolio strategy is built for long-term gains. No allocation mix is going to survive every short-term economic and market hurdle. But you also shouldn't throw it away after one bad year.

Instead, we must keep our eyes on the horizon...

History is clear. If you're focused on growing your money over the long run, then the next couple years should be a great time to do it. Don't let a rough 2022 keep you on the sidelines forever.

Good investing,

C. Scott Garliss and Kevin Sanford

Further Reading

Bonds didn't shield investors from the 2022 downturn. But one specific investment approach succeeded last year – and it was able to outperform the S&P 500 by double digits... Read more here: This Strategy Soared While Stocks and Bonds Were Falling.

Inflation is cooling... which means one of the market's biggest headwinds is beginning to ease. That's good news for U.S. stocks. But thanks to another important trend, it could be even better news for the rest of the world... Read more here: What to Buy as U.S. Inflation Falls.

Market Notes



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