Rumors of death in the 60-40 portfolio – old standby allocations of 60% stock and 40% fixed income investments – are premature. The portfolio, which holds 60% of its assets in US stocks and 40% of its bonds, achieved returns of 16% and 18% in 2023 and 2024, respectively, with returns of 16% and 18%, respectively.
“It’s the exact opposite – the 60-40 is not dead,” says Paisley Nardini, a portfolio manager and asset allocation strategist who simplifies asset management. “If it says it’s dead, then portfolio diversification is dead and I have to say that diversification is more important these days than ever.”
For example, in recent share sales, 60-40 portfolios lost 4%. This reduced the S&P 500 index 9% decline from its peak until the end of April.
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However, many 60-40 investors are nursing bruises from assault they received in 2022. That calendar year, a well-balanced portfolio strategy that had been successful for decades as interest rates fell and bonds flourished, was crushed as interest rates rose as stocks and bonds fell into tandem.
But that’s rare. Last year’s inventory and bonds were both in 1969. Still, the wounds were fueled by a suspected horde of 60-40 people. And it has produced various strategies for fine-tuning the 60-40 equation.
Most, but not all, revisions involve adding so-called alternative investments to your portfolio. These investment strategies provide investors with a way to diversify beyond stocks and bonds.
“The 60-40 portfolio is a two-legged stool,” says Nardini. Adding an alternative (the third leg) can increase stability, especially when the stock market is breathing and sticky inflation.
However, alternative strategies have some caveats. There are many approaches, many are complicated. The broad group includes strategies to invest in private stocks or bond markets, hedge market returns, or actual assets such as real estate, commodities, and even digital currencies. These approaches do not always work in a predictable way, and some are most commonly used as tactical slants rather than long-term holdings.
These days, many mutual funds and exchange trade funds have adopted alternative strategies, making buying and selling easier for do-it-yourself investors. However, they are expensive and charge an average cost ratio of 1.70% (typically, they are less charged for alternative ETFs). In the context, the typical annual fee for US equity funds and ETFs is 0.91%.
The third leg of the stool. If you are thinking of adding an alternative to your portfolio, focus on the goals you want to achieve and invest accordingly.
“At least, the third leg wants to behave differently from inventory and bonds. Otherwise, why are you taking a risk?” Nardini says.
Below we highlighted an easy way to add alternative strategies to your balanced portfolio to achieve your goals. Prices, returns and other data are as of April 30th.
Strengthen your income
Jonathan Lee, senior portfolio manager at US Bank Private Wealth Management in St. Louis, says Real Estate Investment Trusts (REITs) are one of the alternative asset classes that can be held forever. They pay a large dividend – the tax rules require REITs to pay a minimum of 90% of their taxable income – and there is also the promise of a rise in stock prices.
Furthermore, REITs are considered a great inflation hedge as the value of assets and rent tends to rise with price increases.
What they don’t offer is low volatility. For the past decade, REIT funds have been slightly more volatile than the S&P 500.
Baron’s Real Estate Income (BRIFX) boasts below average volatility and a three-year annual record, beating 93% of his colleagues. We will charge an annual expense ratio of 1.05%. Prices for the ETFS Real Estate Select Sector SPDR (XLRE) and the Investco S&P 500 Equal Weight Real Estate (RSPR) are considerably lower. Both index-based funds have beaten more than 60% of real estate fund peers over the past three years.
Infrastructure funds are also used to generate stable income. These funds invest in companies involved in the development, operation, or development of infrastructure-related assets. Many of them earn attractive incomes supported by safe and sustainable cash flow streams. Think airports, highways, railroads, utilities, and power storage.
Global Infrastructure stocks have historically provided buffers for inflation as well, according to Nuveen’s Chief Investment Officer Saira Malik.
Fidelity Infrastructure (FNSTX) is an aggressively managed fund with a 3-year annual return rate of 5.2%, exceeding 71% of its colleagues. It generates 1.3%. ISHARES Global Infrastructure ETF (IGF) generated 2.8%, and over the past three years its annual return rate of 8.1% has surpassed 82% of its peers. Both funding outperformed the recent sell-off and the 2022 S&P 500.
Promote diversification
Nardini said the managed futures strategy is “the lowest correlation between stocks and bonds.” At Managed Futures Fund, experts build a diverse portfolio of futures contracts with a variety of assets, including bonds, equities, commodities, and foreign currency.
These strategies shine when stocks and bonds shake up. In 2022, the typical managed futures funds rose 24%. However, when stocks soar, they become dim. For example, in 2023 and 2024, a typical managed futures fund either lost the ground or was flat.
Also, if long-term returns and volatility are any clue, it is best to use them during periods of pessimism about the market trajectory, and we want to provide a cushion for our inventory portfolio against the slump.
Over the past decade, a typical managed futures fund has posted a slim 1.8% return of 1.8% per year. This was twice as unstable as it barely beat the Bloomberg US tally bond index.
Simplify Managed Futures Strategy (CTA) uses rules-based strategies to identify price trends and invest in futures contracts for stocks, bonds, currencies, and commodities. Over the past three years, the fund’s 9.6% annual revenues ranked in the top 1% of its peers. Also, during the recent sale of the stock, the Simplify Managed Futures Strategy ETF lost 6% (compared to the 9% drop on the S&P 500).
Gold tends to rise when stocks drop. For example, Ishares Gold Trust (IAU) won 12.4% during a recent share sale. In 2022, the ETF was essentially flat, with a loss of 0.6%, and the S&P 500 lost 18%.
Low volatility
The alternative could support 60-40 portfolios during the “big spikes of volatility,” says Megan Horneman, chief investment officer at Verdence Capital Advisors. To hedge the stock risk, which accounts for around 90% of the volatility of the 60-40 portfolio, she proposes adding neutral funds to the market. These funds have different approaches, but the common thread is to move to your own beat, independent of the stock market. Low volatility and stable (but only small) returns are common characteristics.
One of the most stable market neutral strategies is the merger ruling. This includes buying shares at companies that will soon be acquired after the transaction is announced. The fund will benefit from the difference between the price and price after the announcement when the agreement ends.
However, not all transactions are complete, and longtime managers Roy Behren and Michael Shannon have proven that the MerFX (MERFX) has shown that there is a trick to identifying the transaction. Over the past three years, the fund’s 3.9% annual return has surpassed 67% of its peers. In 2022, the fund was flat, with 0.7% returns. You can buy stocks with Fidelity and Schwab without load or trading fees.
Adjust the formula without adding anything
There is a way to adjust the 60-40 portfolio without adding any alternatives.
Rethink Core Bond Holdings first. The current period (a measure of interest sensitivity) of the Bloomberg US Aggregated Bond Index is less than six years. Because bond prices and interest rates move in the opposite direction, the six-year period means that if interest rates rise by 1%, the fund’s net asset value will fall by 6%.
A report from Intrepid Capital, an investment management company in Jacksonville Beach, Florida, found that leaning towards short-term debt in bondholdings (maturity between 1-3 years) could lower the overall interest rate risk for your portfolio and potentially reduce volatility.
Furthermore, despite recent long-term yield increases, there is no need to sacrifice yields. Recently, one-year government notes generated 3.9% and 10-year bonds generated 4.2%.
Our favorite short-term bond mutual and exchange-trading funds are Vanguard Short-Term Investment Grade (VFSTX) and iShares Short-Term Bond Active (near). Both funds are a mixture of corporate and government debt, boasting a short period of time and yields over 4.5%.
It can also help diversify 60-40 portfolios by focusing on neglected parts of the market, such as healthcare and international stocks. Both types of stocks outperformed the S&P 500 from the start of 2025 until March.
“Diversification has been the enemy of the portfolio for the last 10-15 years,” simplifies Asset Management’s Nardini.
Another strategy is to adjust the share-to-bond ratio in your portfolio. Jim Paulsen, a longtime stock strategist who writes about the economy and financial markets from Paulsen’s perspective, recently studied the performance of the 60-40 portfolio against a 100% equity portfolio.
However, if the 10-year yield falls below 4%, investors may want a greater slope against stocks (e.g., 70% shares and 30% bond splits) as lower yields have generally been converted to small bond returns historically. Conversely, if your 10-year yield is well above the 4% mark (for example, in the 6% range, as in the 00’s), then even splits of stocks and bonds may be in place.
Paulsen acknowledges that this approach requires some work, and depending on your resistance to risk, it may not be appropriate for you. (It could also work best with tax deferred accounts to avoid capital gains tax when adjusting your portfolio.) But “it could prove profitable,” he says.
Note: This item was originally featured in Kiplinger Personal Finance Magazine. Subscribe to help you make more money and make more money here.
