Due to the Sharp Rise in US Treasury Yields... Wall Street's Classic '60-40' Investment Strategy Fails

60% Stocks · 40% Bonds Investment, Last Year's Return -17%
Prolonged High Interest Rates Expected, Stocks and Bonds Face Joint Pressure

With the U.S. Federal Reserve (Fed) signaling a prolonged period of high interest rates, the 10-year Treasury yield has surpassed 5%, causing bond prices to plummet (i.e., bond yields to rise), and the once-standard Wall Street diversified investment strategy of '60/40 (60% stocks, 40% bonds)' is no longer effective.

According to the Wall Street Journal (WSJ) on the 20th, analysis by the U.S. investment firm Ritholtz Wealth Management showed that the 60/40 portfolio posted a negative return of -17% last year. This is the lowest performance in 86 years since 1937.

The 60/40 investment strategy allocates 60% of the portfolio to stocks and 40% to bonds. When the stock market is booming, the stocks held contribute to asset growth, and when the market is sluggish, the prices of bonds, considered safe assets, rise, partially offsetting losses from stocks held.

In fact, during the global financial crisis in 2008, the 60/40 portfolio's return was 23 percentage points higher than a 100% stock portfolio. This was due to the Fed lowering interest rates, which caused bond prices to soar. The 60/40 investment strategy was also effective in 1917 when the U.S. entered World War I, during the Great Depression in 1930, and in 1974 when energy prices surged, pushing inflation into double digits.

The problem now is that with high inflation and the Fed's unprecedentedly aggressive tightening leading to prolonged high interest rates, both stock and bond prices are under pressure, and bonds no longer hedge losses in stocks. The U.S. economy continues to perform well with strong employment, solid consumption and spending, and steady growth, causing bond yields to keep rising. The yield on the benchmark 10-year U.S. Treasury note briefly exceeded 5% intraday on the 19th. This is the first time in 16 years since July 2007, just before the global financial crisis, that it has surpassed 5%.

The WSJ reported that some experts recommend diversifying beyond stocks and bonds to include real estate, commodities, and other investment options in response to changing market conditions.

Roger Aliaga-D?az, Senior Economist at Vanguard, analyzed, "The 60/40 investment strategy tends to yield about 6% annually and is especially effective during recessions. The problem arises when interest rates rise rapidly, as they did last year, beyond just being high."

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