The Monthly Rebalanced 60/40 Portfolio as a Tactical Allocation Benchmark

Summary

The article defines a 60/40 benchmark as a portfolio holding 60% equities and 40% bonds, with periodic rebalancing to restore the target weights. It explains the rationale: stock and bond returns may diversify one another, potentially reducing volatility and drawdowns relative to an all-equity allocation. A US implementation uses SPY and AGG, rebalanced monthly, and is compared with an all-SPY portfolio using daily historical data from 2003 to 2019. The reported 60/40 backtest has lower annualized return and volatility than SPY, a higher Sharpe ratio, and a smaller maximum drawdown over the stated sample.

The article also stresses limitations. The sample is constrained by AGG's inception, transaction costs are omitted, and outcomes depend on the start date and market conditions. It attributes much of the sample's later strength to low inflation, falling yields, and strong US equities, while warning that high stock valuations, low bond yields, and a possible increase in stock-bond correlation could weaken future real returns. The benchmark is geographically concentrated and equity exposure accounts for more risk than its dollar weight suggests.

Key ideas

• A 60/40 portfolio periodically restores a 60% equity and 40% bond allocation.
• The diversification premise depends on stocks and bonds not moving in lockstep.
• In the stated 2003–2019 backtest, 60/40 had lower volatility and drawdown than SPY, but lower CAGR.
• The backtest omits transaction costs and covers a limited history because of the bond ETF's inception date.
• Valuations, yields, inflation, and changing stock-bond correlation can alter future results.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.