The Blueprint


Revisiting the 60/40 Portfolio

Jan 2021

Past Performance is Not Necessarily a Prediction of Future Results: Revisiting the 60/40 Investment Model

The 60/40 model is an asset allocation staple that has been used by investors and professionals alike over the last 50 years to balance risk and return. It is based on investing 60% of a portfolio in stocks (S&P 500 Index) and 40% in Bonds (Bloomberg Barclays US Aggregate Bond Index). Strategically, the stock allocation represents the capital appreciation portion of the portfolio, while the bond allocation represents the capital preservation portion. Over the last 50 years, the 60/40 model has delivered compelling annual returns of 9.9%1 compared to 11.2%2 for the S&P 500.

A large reason for the success of the 60/40 model has been the interest rate environment of the past few decades. Interest rates have declined over 94% from their 1981 peak.3 This steady decline pushed bond prices higher and created a stable asset class investors have come to rely on. Cheaper financing also lead to an aggressive expansion of corporate balance sheets facilitating investments in research and development, technology, stock buybacks, and mergers and acquisitions; all of which drove earnings and stocks prices higher. However, the supportive environment of the last few decades may now be a thing of the past.

The 40% of the 60/40 Model

Traditionally, stocks have been considered the primary “risk asset” in a portfolio, while bonds were considered to be their “safe” counterpart. Today, with US Treasuries yielding close to zero, the risk in bonds is very different. At some point, yields may begin to move higher putting pressure on bond prices. Interest rates and bond prices tend to move in an inverse relationship, so that as rates rise, bond prices decline. Even a modest 2% rise in yields could cause a significant loss in bonds.

Higher Rates Will Hurt Bond Values

Impact of a 2% rate increase on Bonds by years to maturity (Investment Grade Bonds)

Source: The American Association of Individual Investors 2018

While the current yield on the 10 yr Treasury is 0.94%3, the average since 1962 is over 6%. We believe many investors are unaware of this, and not prepared for the possibility of their “safe” bond allocations going down 20 to 40%.

Historical 10 Year US Treasury Interest Rates

Source: St. Louis FRED, 10 Year Treasury Constant Maturity Rate, Quarterly, Not Seasonally Adjusted 1/1/1962-10/1/2020

The 60% of the 60/40 Model

Stocks are meant to be the growth engine of the portfolio. As previously mentioned, the stock market is currently at all time highs despite the devastating economic impact of the pandemic. While the performance of the stock market can be attributed to a variety of things, we believe the largest driver this year has come from government stimulus. So far in 2020, the Federal Reserve has expanded it’s balance sheet over $4 trillion dollars providing stimulus checks and purchasing financial assets.4 These actions have created a dependency on the government to support the economy and the financial markets. Should that support be compromised or, if the political willingness to do so were to change, we believe the stock market would experience significant volatility.

Elevated Risks Make Risk Management Even More Important

In order to understand the importance of managing risk, we like to frame the impact of losses with respect to the time it takes to recover from a large market decline. Many investors don’t consider the true impact of these events on their goals until after the damage has taken place. Unfortunately, some investors simply do not have the time to wait for the market to recover their losses from periods of large volatility.

Big Losses Take Longer to Recover

*Assumes 6% annual rate of return Source: Blue Square

The traditional 60/40 investment model has worked successfully for many years as stock and bond markets have risen to new highs and interest rates have gone to new lows. However, with the risks elevated in both asset classes, investors may be exposed to far greater portfolio volatility then they realize. As such, we recommend investors consider alternatives to managing risk in their portfolios as traditional methods, including the 60/40 model, may not prove to be as productive as they have historically been based on the current interest rate and economic environment.

About Blue Square Wealth

At Blue Square, we are focused on risk management and reducing the amount of volatility in our clients’ portfolios. Using our proprietary technology and rules-based approach to investing, our decisions are not swayed by predictions or emotions.

Our investment strategy aims to position portfolios defensively during significant market declines. By systematically raising cash during these periods and then investing it when markets are more accommodating, we aim to create a less volatile investment experience, and ultimately deliver better risk-adjusted returns over full market cycles.

At Blue Square rather than trying to predict the future, we aim to prepare for it, regardless of the market’s direction. Should you have any questions or would like to discuss our strategy and capabilities in more detail, please do not hesitate to reach out and we would be glad to help.


1): Source: Morningstar, 60/40 portfolio consisting of 60% S&P500 TR and 40% Bloomberg Barclay’s Aggregate US Bond Index rebalanced quarterly, 12/1/1980-11/30/2020
2) Source: Morningstar S&P 500 TR, 12/1/1980-11/30/2020
3) Source: ST Louis FRED 10-Year Treasury Constant Maturity Rate, Percent, Quarterly, Not Seasonally Adjusted 7/1/1981-10/1/2020
4) Source: YCharts, 10 Year Treasury Rate, 11/18/2020
5) Source: YCharts, US Total Liabilities Held by All Federal Reserve Banks, 12/23/2019-12/23/20

All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

This is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

This document may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “should,” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. Neither Blue Square nor any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this document.

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Blue Square Wealth is a SEC-Registered Investment Adviser. A copy of the Firm’s Current Disclosure Brochures can be found on the SEC’s IAPD site or may be requested at any time by contacting us. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.

All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio. Past performance is not indicative of future returns.

Significant risk may accompany investments in stocks, bonds or other asset classes over short periods of time. Investment return and principal value will fluctuate with changes in market conditions. Your investment may be worth more or less than your original cost. Past performance is not indicative of future results.

This blog is a publication of Blue Square Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of subjects discussed. All expressions of opinion reflect judgment of author as of date of publication and are subject to change. Information contained herein does not involve rendering of investment advice. A professional adviser should be consulted before implementing any of strategies presented. Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell securities mentioned herein. Different types of investments involve varying degrees of risk. Economic factors, market conditions, and investment strategies will affect performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements relating to objectives, opportunities, and future performance of U.S. markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “should,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to economic conditions, changing levels of competition in industries and markets, changes in interest rates, and other economic, governmental, regulatory and other factors affecting a portfolio’s operations that could cause results to differ materially from projected results. Such statements are forward-looking in nature and involve known and unknown risks, uncertainties and factors, actual results may differ materially from those reflected in forward-looking statements. Investors cautioned not to place undue reliance on forward-looking statements / examples. None of Blue Square Wealth or any affiliates, principals nor any other individual / entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.

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