60/40 Portfolio Suffers Worst Loss Since 1937

The standard 60/40 asset allocation formula recorded a loss of 17.5% in 2022. This marked the worst performance for this strategy since 1937. The decline was driven by simultaneous losses in both equities and bonds. Global equities fell by 18.1% during the same period. The Bloomberg US Aggregate Bond Index dropped by 13%. This was the worst annual result in the index history. The diversification benefit failed completely in this environment.

Central banks raised interest rates to combat rising inflation. This move impacted both asset classes negatively. Higher rates compressed stock valuations and corporate margins. Bond prices fell as yields rose. The traditional assumption of negative correlation between stocks and bonds broke down. Both assets reacted to the same macroeconomic pressure. The market shifted from a low-rate environment to a high-rate regime. This change invalidated decades of historical performance data.

Interest Rate Shifts Break Strategy

The period from 1980 to 2021 favored the 60/40 model. Interest rates and inflation remained low during these decades. The Federal Reserve raised rates in the early 1980s to control inflation. Subsequent years saw a steady decline in rates. The European Central Bank and Bank of Japan used negative rates. These policies created a long-term bond bull market. Ten-year US Treasury yields fell from 15.8% to 0.5% between 1981 and 2021.

Bond funds delivered annual returns of approximately 9% during this era. This performance matched equity returns. The 40% bond allocation provided negligible income of 1% to 2% per annum. This income was insufficient to offset price risks. Long-duration bonds suffered the most significant price declines. The strategy relied on a specific monetary policy context. That context no longer exists in the current market.

Geopolitical Factors Alter Yield Curves

Political actions contribute to rising bond yields. Tariffs and sanctions affect global trade dynamics. The US dollar faces a discount due to credit risks. Higher US interest rates reflect a dedollarisation premium. Investors hold dollars despite risks of excessive debt. Sanctions against surplus economies add complexity. These factors drive up the cost of borrowing. Bond prices must adjust to reflect these new risks.

Allocation formulas do not remain valid indefinitely. Market conditions change with economic contexts. Past success does not guarantee future performance. Strategic adjustments are required for new regimes. The 60/40 model requires re-evaluation. Investors must monitor central bank policies closely. Historical data from the 1980s to 2020s is no longer predictive. The current environment demands different risk management tools. This analysis is based on reporting by GN markets/policy (en-US).