Why the 60/40 portfolio is crushing it — despite market chaos and inflation fears
The 60/40 portfolio brings balance to portfolios — and investors. – Getty Images/iStock
The traditional 60/40 portfolio may not get much respect these days, but it continues to perform.
This is noteworthy because this balanced portfolio has come in for considerable criticism over the past couple of years. It suffered one of its worst years on record in 2022, for example, leading many investors to conclude that there are better ways to reduce portfolio risk than taking 40% of a stock portfolio and investing it in bonds.
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Yet the 60/40 portfolio keeps chugging along. While significantly reducing volatility over the 12 months through the end of this year’s first quarter, it still produced a double-digit gain (11.1%, assuming the stock portion was invested in Vanguard Total Stock Market Index ETF VTI and the bond portion in Vanguard Long-Term Treasury Index ETF VGL).
That’s impressive, given that this 12-month period included the nuclear winter of April 2025’s “liberation day” tariffs, last summer’s bombing of Iran, this year’s Iran war outbreak and the near-doubling of oil prices.
Here are three major objections that investors lodge against the 60/40 portfolio — and why they’re misguided:
1. Stock-bond correlations are increasing
Perhaps the most common argument made against the 60/40 portfolio is that the correlation between stocks and bonds has increased dramatically over the past decade. On the surface that seems damning, since as stocks and bonds become more highly correlated, bonds presumably become less effective at reducing volatility.
That’s an incorrect interpretation of the increased correlation, according to Wes Crill, a vice president at Dimensional Fund Advisors. In an interview, he pointed out that the correlation coefficient rises mechanically during periods of heightened volatility — such as what we’ve seen in recent years. But that has little to do with bonds’ diversification potential.
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A better measure, Crill says, is the ratio of the 60/40 portfolio’s standard deviation to that of an all-stock portfolio. Even though the stock-bond correlation has oscillated widely over the years, this ratio has remained remarkably constant — as you can see from the chart above. In other words, according to Crill, “The proportional reduction in volatility gained through diversification has been largely unrelated to the estimated correlation.”
2. Bonds will perform poorly if inflation worsens
The second major argument lodged against the 60/40 portfolio is that bonds will perform poorly if U.S. inflation worsens. But how do we know inflation will be worse?
Crill argues that it’s important to understand the difference between how bonds react to inflation that is expected (and which therefore is already reflected in bond prices), and their reaction if inflation turns out to deviate from current expectations. If the market currently expects inflation to worsen in coming years, and the market turns out to be right in its expectation, then bonds can still provide a positive real return.
So both investors and financial advisers are guilty of a fundamental confusion when arguing that, because inflation may get worse in coming years, bonds are a poor bet. The inflation threat bonds face isn’t from expected inflation but from unexpected inflation. And by definition unexpected inflation is just that — unexpected.
Crill says there’s no more reason now to avoid the 60/40 portfolio because of concern about what inflation would do to bonds.
3. Better diversification than bonds can be found
The third major argument against bonds in a 60/40 portfolio is that there are superior ways of reducing risk that don’t require forfeiting as much return. Since there are myriad ways of reducing risk besides a 60/40 portfolio, it’s impossible to respond to all of them. But Crill has found from his firm’s research that these alternatives often “add complexity without clear benefit, often increasing fees and reducing transparency while delivering similar underlying exposures.”
As an illustration, Crill pointed to so-called buffered ETFs (also known as defined-outcome or target-outcome ETFs), which provide downside protection in return for forfeiting some of the stock market’s upside potential. One measure of investors’ eagerness to find an alternative to bonds as a portfolio diversifier is the explosive growth in these ETFs’ assets under management— more than $75 billion currently, according to ETF.com, and projected by Cerulli Associates to grow to more than $300 billion by 2030.
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Despite the considerable hype surrounding these buffered ETFs, Crill has found their risk-reward profile to be substantially similar to the 60/40 portfolio. This is illustrated in the chart above, which plots portfolio return as a function of the S&P 500 SPX. Notice that the risk-reward line for the 60/40 portfolio is almost identical to that of the average buffered ETF. So there’s no reason to deviate from the traditional portfolio that invests 60% in a stock index fund and 40% in a bond index fund.
Bottom line? If it ain’t broke, don’t fix it.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at
