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Strategies
The storm over the so-called 60/40 investment portfolio misses the point, our columnist says. The key issue is diversifying your portfolio, and that is as important as ever.
By Jeff Sommer
Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.
It isn’t dead. It’s more important than ever.
I’m talking about the 60/40 portfolio, which has sometimes been considered the living heart of investing. Those specific numbers — which refer to 60 percent stock and 40 percent bonds as core investment holdings — aren’t significant. They are merely a convenient starting point for thinking about investing and not an exact, general-purpose prescription for everyone. Nor have they ever been.
But they do represent a fundamental principle. While it’s more complicated, it comes down to this: Don’t keep your eggs in one basket. Diversify rigorously and systematically among stocks and bonds, and do it for the long haul.
The claim that this concept is dead doesn’t make sense. Diversification in investing is as important now as it ever was, even if it hasn’t paid off lately.
But what is true is that both stocks and bonds performed poorly over much of the last two years, especially in 2022. Soaring inflation and rising interest rates led to bond losses along with a drop in the stock market. If you held a broad portfolio of stocks and bonds in 2022 — whether your mix was 60/40 or some other variant — you probably lost money. Neither the stocks nor the bonds helped.
That was awful. But the solution isn’t to abandon diversification. It is to stick with it, and maybe even diversify further.
The Core Concept
Harry Markowitz was a giant of finance. He was also an earthy Chicagoan, who told me back in 2012 that he was comfortable with using eggs in a basket to describe his work, for which he won a Nobel Prize in 1990.
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