Does the 60-40 portfolio still work? Part 1/2

There is little doubt that the 45-year bond bull market that lasted from the mid-80s through to the post-COVID period was a remarkable boon for fixed income investors who took full advantage of the fact that interest rates were falling. As the world globalised through the 90s and into the 2000s, the prevailing view was that the tidal wave of additional productivity was going to keep inflation low, and therefore continue to either keep interest rates low, or drive them even lower.

And it happened, very clearly. Back in September of 1981, the 10-year US Treasury bond peaked at 15.84%. From there, a steady decline ensued for so long and so consistently that we got to 0.32% in March 2020, just as COVID-mania hit the globe.

Two things about that. First, of course there were some bumps up-and-down-and-sideways during that long stretch – it wasn’t just all down. But the chart has a very distinctive trend, and it’s abundantly clear. Second, money is often made in moments of maximum, something. It could be exuberance, it could be stress, it could be uncertainty, it could be upheaval. Being willing to take the other side of a prevailing trend is hard to do, but if you get it right, it should serve you very well.

Imagine going short in March of 2000, in the middle of the tech boom, and telling people, “I’m certain markets are going to collapse”. Imagine then going long, in September of 2002. The world is entirely united in its fight against terror, but the cost is high, and the economic ripple effects of the tech wreck into the 9-11 terrorist attacks still loom large. OK, now imagine it’s the middle of 2007 and the world is benefiting from a levered position into the ever-growing US housing market. There’s no way anyone is going to tip up the table, why would they do that?? But you decide to go short and that single decision made the careers of multiple investors on Wall Street who have continually got things wrong since, but are lauded solely for that one decision, even to this day (I’m looking at you John Paulson, Michael Burry, and Nassim Taleb).

I was living and working in New York during the financial crisis, and it was a surreal experience. Streets were much emptier, restaurant reservations were easy to get, you could get a seat on the morning subway. The place was blanketed with a mix of fear, concern, and expectation. So imagine going long in March of 2009….imagine!!!

You get the drift – it’s easy to look back and see it but in the moment, it’s diabolically difficult to go against the grain.

The “grain”, for as long as I’ve been in this business (and I am old so that’s a long time), has been that bonds were a great counter balance to stocks, and as you get older and retire, you should grow your bond allocation to make sure that your stocks never kill your portfolio, or your expected returns, or your income. And the sweet spot between growth investments and defensive investments was 60-40. That is, 60% at-risk stocks and 40% defensive fixed income.

But there is a view forming that maybe that relationship has broken down from its traditional place. What if I told you that the US-based investable option for the supposedly risk-free asset of intermediate US Government bonds (that includes the 10-year US Treasury bond) has actually fallen in value by almost 2% per year, every year, for the last 5 years?

Does that sound risk-free??

In this two-part wire, I want to walk through the recent history of 60-40 - - that is, look at when you have needed it to work, see if it did work, but then I also want to explore the possibility that there is a different way.

Let’s frame this idea like this. First, let’s all agree that over time, going back 30, 40, 50 years, the 60-40 set-up has worked. If it hadn’t, it wouldn’t have endured for as long as it has, and I wouldn’t be writing this piece on it. Second, agreeing that it has worked over time, let’s take a look at the last 5 major market events when, as an investor, you would have wanted the 60-40 portfolio to work. And third, I’m going to also include the financial crisis because it was such a seismic event, because it has framed so much of today’s market structure, and because there’s a good chance that the downturn of 2007-2009 was the first time many people reading this got a large drawdown that they were meaningfully involved in.

Did sacrificing long term growth by being exposed to bonds give you the protection you banked on in the moments you needed that protection the most? I’m going to use investable options of both the S&P 500 and the 10-year US Treasury bond as proxies.

(* as of 16 Apr 2026, when I wrote this - although even since then, the point still holds)

A few things to note:

1. In no year did the 40% buffer protect you from losing money. Not once.

2. In 2 of the last 3 drawdowns of stocks, the bonds piece also fell.

3. To reiterate, the investable vehicle for US 10-year Treasury bonds is down almost 2% per year for the last 5 years.

This is the data that has market participants asking the question - - does 60-40 still work?

In part 2 of this wire, I’ll explore a different option that will provide an alternative execution to what is essentially the same principle.

The other option isn’t necessarily better, or worse, it’s just a different approach, and maybe more suited going forward. Let’s see.

Good luck out there.