The 60/40 portfolio: history, returns and when it breaks

The 60/40 portfolio — 60 % in stocks, 40 % in bonds — is the most famous default in investing. Pension funds, robo-advisers and target-date funds are built around it. It is popular for a good reason: for most of the last 25 years it delivered most of the stock market's return with far smaller losses. And it is criticised for a good reason too: in 2022 it lost more than the stock market alone.

This guide shows what a 60/40 portfolio is, what it has returned, where it broke, and the one measurement that tells you in advance whether the "40" is likely to protect the "60".

What is a 60/40 portfolio?

A 60/40 portfolio holds 60 % of its money in equities (usually a broad index such as the S&P 500 or a world index) and 40 % in bonds (usually government bonds). Once or twice a year, or when the weights drift too far, it is rebalanced back to 60/40: after a strong year for stocks you sell some stocks and buy bonds, after a crash you do the opposite.

The idea behind it is not that bonds earn a lot. It is that, most of the time, they move in the opposite direction to stocks when it matters. When stocks fall in a recession, central banks cut interest rates, bond prices rise, and the bond half cushions the fall.

Historical returns of the 60/40 portfolio

Here is the record since 2002, with 60 % in the S&P 500 and 40 % in long-term US Treasuries, rebalanced monthly, total return (dividends and interest reinvested), before costs and taxes:

Data: S&P 500 (SPY) and US Treasuries 20Y+ (TLT), month-end total returns, Aug 2002 – Sep 2026. Long-term Treasuries make the bond effect larger in both directions than a broad bond fund would.

Two things stand out. Over the whole period the 60/40 portfolio gave up about 2.5 percentage points of return per year — the price of holding bonds instead of stocks. In exchange it cut the worst fall roughly in half and the day-to-day swings by a third. For many investors that trade is worth it, because a portfolio you can hold through a crisis beats a better one you sell at the bottom.

The second thing is the line for 2022.

The worst years: 2008 and 2022

In 2008 the 60/40 portfolio did exactly what it is designed to do. Stocks lost almost 40 %; long-term Treasuries rose by more than 30 % as investors fled to safety and the Federal Reserve cut rates to zero. The 60/40 portfolio ended the year down about 15 % — painful, but survivable.

In 2022 the opposite happened. Inflation hit 9 %, the Federal Reserve raised rates at the fastest pace in four decades, and both halves of the portfolio fell at the same time. Long-term Treasuries lost about 30 %. The 60/40 portfolio ended the year down about 23 % — worse than the S&P 500 on its own.

So which is the real 60/40: 2008 or 2022? Both. The difference is not luck. It is a measurable condition.

Why stocks and bonds sometimes fall together

Whether bonds protect stocks depends on the correlation between them — whether they tend to move in the same or in opposite directions. When the main risk for the economy is a recession, bad news for stocks is good news for bonds, and the correlation is negative. When the main risk is inflation and rising rates, bad news hits both at once, and the correlation turns positive.

From 2003 to 2021 the correlation was negative almost all the time — the golden era of the 60/40 portfolio. It turned positive in 2022 and has stayed positive since. History says this is not unusual: our research on 150 years of US data found that from 1966 to 1999 the three-year stock–bond correlation was positive in 94 % of all months. The negative correlation that most investors take for granted is a feature of the low-inflation decades, not a law of nature.

Is the 60/40 portfolio dead?

No — but it is not automatic either. Three findings from White Paper No. 1, When Bonds Stop Hedging:

• The starting condition decides. Of the 12 big S&P 500 sell-offs since 1955, the five where bonds clearly protected investors all began with a negative stock–bond correlation. In the sell-offs that started with a positive correlation, Treasuries were roughly flat and cash did better.
• Inflation keeps a broken hedge broken. When the correlation is positive and inflation is above about 4 %, the hedge has historically stayed broken for years.
• Prediction does not work, measurement does. We tested six real-time signals that try to forecast whether bonds will hedge over the next two years; none beat a naive guess by much. What does work is knowing which regime you are in today — regimes last years, not months.

That is why we publish Hedge Health in the free Research Terminal: GREEN when the correlation is negative (bonds hedge), AMBER when it is positive but inflation is below 4 %, RED when it is positive and inflation is above 4 %. As of the latest reading it is AMBER.

How to use a 60/40 portfolio today

• Know your regime. Check the stock–bond correlation and inflation once a quarter. When it is GREEN, bonds are doing their job. When it is AMBER or RED, do not count on them as your only crash protection.
• Diversify the defensive part. In our tests, spreading the "40" across bonds, cash (T-bills) and some gold held up better across regimes than bonds alone. Cash paid 4–5 % in recent years and never falls when stocks crash.
• Prefer shorter bonds when the hedge is broken. Long-term bonds carry the most interest-rate risk; in 2022 they fell almost as much as stocks.
• Consider a trend filter for the equity part. A systematic strategy that steps out of stocks in a downtrend addresses the problem from the other side: it limits the fall of the "60" itself.
• Rebalance on a schedule, not on headlines. Once a year or when a weight drifts more than five percentage points is enough.

60/40 vs 100 % stocks: which is better?

It depends on how much of a fall you can actually sit through. Since 2002, 100 % stocks ended with more money — but the investor had to stay invested through a −51 % fall in 2008–09 and then wait more than three years to get back to the old high. A 60/40 investor fell −28 %. If you would have sold at the bottom, the 60/40 portfolio would have left you much richer. Use the drawdown recovery calculator to see what each fall means for your own portfolio.

Frequently asked questions