Taking stock of bonds: Does the 60/40 rule still have a role in retirement savings?

The 60/40 rule is a fundamental tenet of investing. It says you should aim to keep 60% of your holdings in stocks, and 40% in bonds. 

Stocks can yield robust returns, but they are volatile. Bonds provide modest but stable income, and they serve as a buffer when stock prices fall. 

The 60/40 rule is one of the most familiar principles in personal finance. Yet, not long ago, much of the investment community walked away from it. 

A chorus of essays and think pieces in 2023 and early 2024 asked if the 60/40 portfolio was dead, explained why it might no longer be good enough to sustain a balanced portfolio, and offered up investment alternatives.  

The reason: 2022. Bonds suffered one of their all-time worst years, buffeted by a one-two punch of spiraling inflation and rising interest rates.  

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As 2024 draws to a close, however, investors are warming again to 60/40.  

Should investors still follow the 60/40 rule?

In a recent report, the Vanguard investment firm reaffirmed 60/40 as “a great starting place for long-term investors, and that is as true today as any time in history.” 

Other investment experts concur.  

“Sixty-forty is still a good benchmark for a balanced portfolio,” said Jonathan Lee, senior portfolio manager at U.S. Bank.  

And Todd Jablonski, global head of multi-asset investing for Principal Asset Management, considers the 60/40 rule “very much alive. I could make some Mark Twain jokes,” he said. 

The 60/40 rule arises from common wisdom, which dictates that an investment portfolio should be balanced, especially as we approach retirement.  

Stocks can deliver returns of about 10% a year, a much higher rate than an investor is likely to reap in an ordinary bank account. But the stock market is mercurial, and in a recession, it can nosedive. 

Bonds are supposed to be safe, predictable, boring: the perfect foil to stocks. When stocks go down, bonds go up, at least in theory. 

'Boring' bonds went haywire in 2022

The events of 2022, however, seemed to turn the market on its ear. Stocks lost 18.6% of their value, as measured by the S&P 500. And bonds lost 13.7% of their value, according to the Vanguard Total Bond Market Index. After inflation, it was the worst bond return in 97 years, according to a NASDAQ analysis. 

The bond bloodbath prompted some investors to question whether it was time to rewrite the rules of retirement saving, starting with the 60/40 rule. 

Here’s why bonds tanked: In 2022, the Federal Reserve embarked on a dramatic campaign of interest-rate hikes in response to inflation, which reached a 40-year high. 

That was bad for bonds. Bond funds tend to lose value when interest rates rise, and when inflation ticks up. 

Rising interest rates tend to lift yields on new bonds. That makes older bonds less attractive, because they have lower yields. That cycle pushes down the value of bond funds. 

Rising inflation makes bonds less attractive, too, because it erodes their value. If a bond pays 4% interest, and inflation reaches 5%, then the bond’s effective rate of return is negative. 

Even before 2022, bonds weren’t doing all that well. Interest rates sat at historic lows through much of the post-2008 era, a result of the Great Recession and, later, the covid pandemic. Investors generally make less money on bonds when interest rates are low.  

“I think investors began to look at bonds and say, ‘How much lower can it go?’” Jablonski said.  

The 60/40 landscape is different in 2024

Today, the bond landscape looks very different. Inflation has eased. Interest rates are falling but still elevated, which means new bonds are paying solid returns. 

And investors who follow the 60/40 rule are doing pretty well. 

In 2022, by Jablonski’s calculations, the 60/40 portfolio lost 15.8%. But in 2023, the same portfolio rose by 17.7%. And this year, through November 6, the 60/40 investor is up 15.5%.  

“That’s a pretty good level of return,” he said. 

Even when you include the dismal 2022 numbers, Vanguard found, the 60/40 portfolio has gained 6.9% a year, on average, over the past 10 years.  

“The past decade has been a strong one for 60/40, because the equities,” meaning stocks, “have been performing particularly well,” said Todd Schlanger, senior investment strategist at Vanguard and author of the October report. 

Now, with the stock market riding high, investors should expect somewhat lower stock gains in the years to come. By historic standards, the stock market is overvalued. 

As a result, “it’s likely that returns for 60/40 will be lower than in the past 10 years,” Schlanger said.  

But don’t blame bonds.  

Bonds will “make a more meaningful contribution over the next 10 years than they did in the last 10 years,” Schlanger said. 

The current yield on the benchmark 10-year Treasury bond is about 4.3%, CNBC reports. The yield is the annual interest rate the investor receives over the bond’s term. And right now, yields are outpacing inflation. 

“People are warming up to bonds, because interest rates are higher than they used to be,” Lee said.  

Bonds have been sinking.Do they still have a place in your retirement account?

Bond yields are rising along with the deficit

One reason bond yields are high, especially on the long term, is that investors are worried about the federal government’s rising debt. 

The interest rate on a 10-year Treasury note rose to its highest level in months Wednesday, in the wake of news of Donald Trump’s election to a second term as president.  

Trump campaigned on low taxes. Economists predict Trump’s tax policy will widen the federal deficit, the shortfall between spending and revenue. The deficit stands at $1.8 trillion. 

“The risk in the market with Trump is an undisciplined fiscal situation. At some point in 2025, the deficit will grab the narrative of the market,” said James Camp, managing director of fixed income and strategic income at Eagle Asset Management in St. Petersburg, Florida, speaking to Reuters. 

Bond yields are rising, at least in part, because investors feel greater risk that the government is living beyond its means, Jablonski said.  

And therein lies another cardinal rule of finance: A less creditworthy borrower has to pay higher interest rates, even if it’s the government.