The 60/40 Portfolio Strategy May Be Broken For The First Time In History

The traditional 60/40 portfolio investment strategy may now be obsolete. According to BMO analyst Lowell Yura, the strategy of a balanced portfolio of 60 percent equities and 40 percent bonds will likely dramatically underperform its historical gains in coming years.

Yura says that the basis for the 60/40 strategy is the idea that bonds will generate stability and lower risk and will help balance the higher returns and higher risk of equities. However, this assumption that investors can expect moderate, stable returns from bonds may be unrealistic in the current market.

While interest rates have been historically low since the Great Recession, Yura points out that bond yields have been in secular decline since the 1980s.

From 1981 to 2015, the balanced 60/40 portfolio has averaged a 9.6 percent annual return. BMO projects that the same portfolio will generate about 4.5 percent annual return over the next decade, weighed down by only 2.6 percent return from bonds.