The 60-40 Portfolio Rule of Investing: Not Dead Yet?

High angle view of a piggy bank and colorful pie chart on pink background - stock photo

(Image credit: Getty Images)

Rumors of the death of the 60-40 portfolio — that old standby allocation of 60% stocks and 40% fixed-income investments — are premature. A portfolio that held 60% of its assets in U.S. stocks and 40% in bonds has performed well recently, with returns of 16% and 18%, respectively, in 2023 and 2024.

“Quite the contrary — the 60-40 is not dead,” says Paisley Nardini, a portfolio manager and asset allocation strategist with Simplify Asset Management. “If we say it’s dead, we’d also have to say portfolio diversification is dead, and diversification is more important than ever these days.”

In the recent stock selloff, for instance, a 60-40 portfolio would have lost 4% — less than the 9% decline in the S&P 500 index from its peak through the end of April.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

But many 60-40 investors are still nursing bruises from the beating they received in 2022. That calendar year, a balanced portfolio strategy — which had succeeded for decades as interest rates declined and bonds thrived — got crushed as rising interest rates sent stocks and bonds tumbling in tandem.

That’s rare, though. The last year stocks and bonds both fell was 1969. Even so, the wounds fueled a horde of 60-40 doubters, who argued that the portfolio had gotten riskier. And that spawned a variety of strategies to tweak the 60-40 formula.

Most fixes, but not all, involve adding so-called alternative investments to the portfolio. These investment strategies offer investors a way to diversify beyond stocks and bonds.

“A 60-40 portfolio is a two-legged stool,” says Nardini. Adding alternatives — a third leg — can provide increased stability, especially now with the stock market taking a breather and sticky inflation weighing on the bond market.

However alternative strategies come with several caveats. There are numerous approaches, and many are complex. The broad group includes strategies that invest in private stock or bond markets, hedge market returns, or invest in real assets, such as real estate, commodities and even digital currencies. These approaches don’t always behave in predictable ways, and some are best used as tactical tilts rather than long-term holdings.

These days, many mutual funds and exchange-traded funds employ alternative strategies, making them easy for do-it-yourself investors to buy and sell. But they’re pricey, charging an average expense ratio of 1.70% (though generally, alternative ETFs charge less). For context, the typical annual fee of U.S. stock funds and ETFs is 0.91%.

A third leg for the stool. If you are thinking of adding alternatives to your portfolio, focus on the goal you want them to accomplish, and invest accordingly.

“At the very least, you want the third leg to behave differently from stocks and bonds. Otherwise, why are you taking on the risk?” says Nardini.

To help you meet your objectives, we’ve highlighted below some easy ways to add an alternative strategy to your balanced portfolio. Prices, returns and other data are as of April 30.

Enhance income

Real estate investment trusts, or REITs, are one alternative asset class you can hold forever, says Jonathan Lee, a senior portfolio manager at U.S. Bank Private Wealth Management in St. Louis. They pay big dividends — tax rules require REITs to pay out a minimum of 90% of taxable income — and there’s the promise of share price gains, too.

What’s more, REITs are considered good inflation hedges because property values and rents tend to move up with rising prices, says Mayukh Poddar, a senior portfolio manager at Altfest Personal Wealth Management in New York City.

What they don’t offer is lower volatility. Over the past decade, REIT funds have been slightly more volatile than the S&P 500.

Baron Real Estate Income (BRIFX) boasts below-average volatility and an annualized three-year record that beat 93% of its peers. It charges a 1.05% annual expense ratio. The fees for ETFs Real Estate Select Sector SPDR (XLRE) and Invesco S&P 500 Equal Weight Real Estate (RSPR) are considerably lower. Both index-based funds beat more than 60% of their real-estate fund peers over the past three years.

Infrastructure funds are also prized for generating stable income. These funds invest in companies that own, operate, or are involved in the development and service of infrastructure-related assets, many of which provide an attractive income yield backed by secure and sustainable cash-flow streams. Think airports, highways, railroads, utilities and electricity storage.

According to Nuveen chief investment officer Saira Malik, global infrastructure stocks have historically provided a buffer to inflation, too.

Fidelity Infrastructure (FNSTX) is an actively managed fund with a three-year annualized return of 5.2%, which beat 71% of its peers. It yields 1.3%. iShares Global Infrastructure ETF (IGF) yields 2.8%, and its annualized return of 8.1% over the past three years beat 82% of its peers. Both funds held up better than the S&P 500 in the recent selloff and in 2022.

Boost diversification

Managed futures strategies “have the lowest correlation to stocks and bonds,” says Nardini. In a managed futures fund, a professional builds a diversified portfolio of futures contracts in a variety of assets — bonds, stocks, commodities and foreign currencies.

These strategies shine when stocks and bonds are faltering. In 2022, the typical managed futures fund gained 24%. But they dim when stocks soar. In 2023 and 2024, for instance, the typical managed futures fund lost ground or was flat.

And if long-term returns and volatility are any clue, they’re best used during periods when you’re pessimistic about the market’s trajectory and you want to provide your stock portfolio with a cushion against downturns.

Over the past decade, the typical managed futures fund posted a slim, 1.8% annualized return. That just barely beat the Bloomberg U.S. Aggregate Bond index, and it was twice as volatile.

Simplify Managed Futures Strategy (CTA) uses a rules-based strategy to identify price trends and invest in futures contracts in stocks, bonds, currencies and commodities. Over the past three years, the fund’s 9.6% annualized return ranked in the top 1% of its peers. And during the recent selloff in stocks, Simplify Managed Futures Strategy ETF lost 6% (compared with the S&P 500’s 9% drop).

Gold also tends to move up when stocks fall. For instance, iShares Gold Trust (IAU) gained 12.4% during the recent stock selloff. And in 2022, the ETF was essentially flat, with a 0.6% loss, while the S&P 500 lost 18%.

Lower volatility

Alternatives can help a 60-40 portfolio during periods of “big spikes in volatility,” says Megan Horneman, chief investment officer at Verdence Capital Advisors. To hedge stock risk — which accounts for about 90% of the volatility in a 60-40 portfolio — she suggests adding a market-neutral fund. These funds vary in approach, but the common thread is they move to their own beat, independent of the stock market. Low volatility and steady (albeit modest) returns are common characteristics.

One of the steadiest market-neutral strategies is merger arbitrage, which involves buying stocks in soon-to-be-acquired companies after a deal has been announced. The fund earns a profit on the difference between the post-announcement price and the price when the deal closes.

Not all transactions are consummated, however, and longtime managers Roy Behren and Michael Shannon at the Merger Fund (MERFX) have proved that they have a knack for identifying deals that do. Over the past three years, the fund’s 3.9% annualized return beat 67% of its peers. In 2022, the fund was flat, with a 0.7% return. You can buy shares without a load or a transaction fee at Fidelity and Schwab.

Tweak the formula without adding anything new

There are ways to adjust your 60-40 portfolio without adding alternatives.

Rethink your core bond holdings, for a start. The Bloomberg U.S. Aggregate Bond index has a current duration (a measure of interest-rate sensitivity) of a little less than six years. Bond prices and interest rates move in opposite directions, so a duration of six years implies that if interest rates rise by one percentage point, a fund’s net asset value will fall by 6%.

A tilt toward short-term debt (with maturities of one to three years) in your bond holdings can lower the overall interest rate risk of your portfolio and potentially reduce volatility, too, according to a report from Intrepid Capital, an investment management firm in Jacksonville Beach, Fla.

Plus, these days, you don’t have to sacrifice much in the way of yield, despite a recent rise in long-term yields. Recently a one-year government note yielded 3.9% and a 10-year bond yielded 4.2%.

Our favorite short-term bond mutual and exchange-traded funds are Vanguard Short-Term Investment-Grade (VFSTX) and iShares Short Duration Bond Active (NEAR). Both funds hold a mix of corporate and government debt, boast short durations, and have better than 4.5% yields.

You can also boost diversification in your 60-40 portfolio simply by focusing on neglected parts of the market, such as health care and international stocks. Both kinds of shares outperformed the S&P 500 from the start of 2025 through March.

“Diversification has been the enemy of portfolios for the past 10 to 15 years,” says Simplify Asset Management's Nardini, “but we see a tailwind in the future for diversifiers in a portfolio.”

Another strategy is to adjust the ratio of stocks and bonds within the portfolio. Jim Paulsen, a longtime stock strategist who writes about the economy and financial markets in Paulsen Perspectives, recently studied the performance of a 60-40 portfolio against a 100% stock portfolio and found that when the 10-year Treasury yield hovers around 4% — though it has been on the rise — a 60-40 portfolio has delivered returns that hewed close to an all-stock portfolio, with lower volatility.

But when the 10-year yield falls below 4%, investors may want to tilt more toward stocks — say, a split of 70% stocks and 30% bonds — because historically, lower yields have generally translated into paltry bond returns. Conversely, if the 10-year yield rises well above the 4% mark — say, in the 6% range, as it did in the ’00s — an even split between stocks and bonds may be in order.

Paulsen admits this approach requires some work, and depending on your tolerance for risk, it may not be appropriate for you. (It also may work best in a tax-deferred account to avoid capital gains taxes as you adjust your portfolio.) But “it may prove profitable,” too, he says.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.