By Josh Katzowitz, WCI Content DirectorMaybe it’s just me, but whenever an investor talks about a 60/40 portfolio—where 60% of the investment is invested in equities (which are considered risky but which will likely make you more money in the long run) and 40% is in bonds (which are considered safe but which probably won’t sustain the growth to beat inflation)—it feels like an old-fashioned concept.
The 60/40 idea came to popularity in the 1950s, and it relies on the idea that stocks and bonds are negatively correlated (when stocks go up, bonds go down, and vice versa) and that “spreading out risk exposure resulted in better risk-adjusted performance.” A 60/40 portfolio theoretically ensures that both opportunity and protection are tucked in to your strategy.
Since I became financially literate, I’ve thought 60/40 would work for somebody who’s about to retire but that I’d need way more equity exposure (80/20, 90/10, or even 95/5) in most of our working years and/or way more diversification to get to my financial independence number. Even most target date funds are way more aggressive than 60/40.
To me, 60/40 was like wearing a suit and hat or a pencil skirt and gloves to work every day. That attire was appropriate 75 years ago. Times have changed; you can diversify your work clothes (athletic shorts and flip flops, anyone?) AND your investment strategy.
But that’s not what Morningstar claims in its recent Diversification Landscape Study. In that piece, Morningstar says the 60/40 portfolio might actually be a better strategy than one that calls for more diversification. That sounds way too old school to be true, but perhaps there’s some merit to the argument.
Is 60/40 Better Than a More Diversified Portfolio?
Here are some of Morningstar’s key takeaways:
- In 2024, a 60/40 portfolio gained 15%; diversifying into other asset classes led to worse results.
- Going back to 1976, 60/40 “improved risk-adjusted returns” when compared to an all-stock portfolio in about 83% of rolling 10-year periods.
- Since US stocks have beaten international stocks so badly (through 2024), international diversification might not be a great idea.
- Since the turn of the century, some asset classes (corporate bonds, high-yield bonds, municipal bonds, REITs, TIPs) have “become more closely correlated with stocks” and “many of these categories have also posted losses in periods of equity market stress.” Does anybody remember 2022?
- It’s unclear how the Trump administration’s tariffs policy will affect the investment world, “potentially upending many previously established performance patterns.”
Morningstar’s conclusions are fascinating, because writers like Ben Carlson and websites like Investopedia have wondered in the past few years whether 60/40 was actually dying.
In looking at 2024 returns, though, Morningstar said 60/40 beat the portfolios with more diversified assets by about 5%, and even over the past few decades, the old-fashioned idea would still provide more money than the newer theories. As the site wrote, “Thanks to slightly lower correlations for many of the ‘diversified’ asset classes, the diversified portfolio would have done a better job reducing risk, but not enough to result in higher risk-adjusted returns.”
A big reason for that is because international stocks have lagged behind domestic stocks this century and because many of these asset classes, thanks to higher interest rates and inflation, have become more correlated, reducing the value of diversification.
As Morningstar writes,
“The rise in correlations across many major asset classes in recent years illustrates the complexity involved in building a diversified portfolio. Not only are correlations constantly shifting, but they often rise during periods of market volatility. As a result, while broad portfolio diversification led to slightly lower losses during 2022, this approach has often failed to add value when compared with an equity-only portfolio or a plain-vanilla mix of stocks and bonds.”
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Do the Experts Agree with Morningstar?
I was unconvinced. The 60/40 still feels too much like Mad Men and a Harvey Wallbanger at lunch. I talked to three financial experts to get their take on the Morningstar study.
Bryan Jepson, an emergency medicine physician and a licensed financial advisor who works for WCI-recommended Targeted Wealth Solutions, agreed with the idea that asset classes are becoming more correlated and that, as a result, diversification has less value than before. When he’s tested a more diversified portfolio using index funds and compared it to a simple S&P 500 fund, the former has underperformed.
But he also wonders about putting too much of your portfolio into bonds.
“How well is a 60/40 portfolio going to compare against a higher stock allocation over time?” asked Jepson, who has written WCI guest posts about the risk of retirement and how to manage it and tax considerations for special needs children. “Bonds do almost as bad as stocks in a high inflationary and increasing interest rate environment, like we have had over the last several years. Those invested in bonds during that time lost way more than they probably expected, not anticipating that bonds could drop that much. With the tariffs and the ever-changing policy decisions, there is a lot of uncertainty in the market right now, and I expect the interest rates to stay high for a while yet. Once interest rates start coming down, bonds will do better again. But I don’t think they give as much downside protection as everybody hopes for (just the lower upside).”
Unless you’re closing in on retirement and need to protect against the Sequence of Returns Risk, he’d rather you go more heavily on equities.
Here’s his proof. Jepson ran a portfolio analysis comparing a S&P 500/total bond market fund 60/40 portfolio vs. a more diversified 60/40 (to include small cap stocks, international, and real estate) and then a S&P 500/total bond market fund 90/10 vs. the S&P 500. Here are the results, going back to 2001:
His takeaways from that chart:
- The S&P 500/total bond fund did better than the differentiated portfolio in both return and risk (standard deviation, max drawdown, Sharpe and Sortino ratios).
- As would be expected, the higher stock portfolios did much better in return but with more risk. But those returns can result in hundreds of thousands of dollars difference if you are talking about investing more than $10,000 and will continue rising exponentially. So, it makes a big difference in outcome if you have the time available in the market.
He also shortened the time frame in all of those options to the past five years.
As he said,
“Now, the higher stock portfolios actually have better Sharpe and Sortino ratios with a way more significant difference in returns with a fairly similar drawdown.
“So, what is it going to be moving forward? Not sure, of course, but I would expect more like the last five years than the 15 years before that. I don’t expect the super low interest rates that we enjoyed during the last 10 years or so before the recent rise.”
WCI founder Dr. Jim Dahle—whose portfolio is 60% stocks, 20% bonds, and 20% real estate—is a big fan of diversification between asset classes and within asset classes. He said having 3-7 asset classes in your portfolio makes the most sense to him. While he agreed with bits and pieces of the Morningstar study, particularly the point that when you need bonds, “really safe ones are the ones you need,” it also seemed too much like performance chasing to him.
“Really, investing experts? You think someone should quit investing in international stocks because of poor recent performance?” he said. “You really didn’t think that pendulum was ever going to swing back? . . . I quit making predictions like these publicly in any sort of serious manner because they kept being wrong. Even experts performance chase.”
Chad Chubb of WCI-recommended WealthKeel made the point that the diversified portfolio Morningstar used is VERY diversified and includes commodities, gold, and REITs, which is not something he would use for a normal allocation. As for what his financial firm would advise:
“Our portfolio has remained largely consistent over the past decade, with only minor adjustments. During the height of the COVID-19 pandemic and shortly thereafter, we slightly reduced our international exposure, but we’ve since rebalanced to near-normal levels. In fact, we’re now slightly overweight in developed international markets.”
Despite Morningstar’s finding, Chubb is still gung-ho about diversification, and that includes international exposure for your portfolio.
“The US market’s remarkable strength over the past decade might tempt investors to focus solely on domestic equities, but long-term investors, like the WCI Nation, should stay the course with global diversification,” Chubb said. “Vanguard’s latest annual report forecasts a potential resurgence for international markets, and while predictions are never certain, we believe maintaining international exposure will enhance portfolio outcomes over the next decade compared to the last.”
To put a finer point on that, the July market report showed that YTD international stocks are pummeling their US counterparts in 2025 (17.17% vs. 8.04%). As Chubb said, if you had gotten rid of your international exposure before 2025, you would have missed out on a significant rally.
Will that performance last? Who knows. But no matter what Morningstar’s study shows, here’s what you should do. Ignore the outside noise and focus on yourself.
“Changing your investment plan based on financial news, even financial news published by a relatively reputable company like Morningstar or Vanguard or Fidelity, is usually a mistake,” Jim said. “I think you’re better off putting together a fixed, static, written asset allocation and following it through thick and thin for decades. Every reasonable asset class will have its day in the sun and you want to own it when it does rather than selling it just before that day shows up.”
Money Song of the Week
As we bid a fond farewell to Ozzy Osbourne, who died at the age of 76 last month, let’s reminisce about the Prince of Darkness taking aim at one of his naysayers who eventually got his own comeuppance. In 1988’s Miracle Man, Ozzy alludes to televangelist Jimmy Swaggart, who criticized Ozzy for his lyrical content and for apparently depraving the youth but who later tearfully admitted to his own sinful ways.
In much the same way Phil Collins blasted the 1980s televangelists and their appeals for more and more money, Ozzy was more than happy to point out the hypocrisies.
As Ozzy sings,
“I’m looking for a Miracle Man/That tells me no lies/I’m looking for a Miracle Man/Who’s not in disguise.
I don’t know where he’ll come from/And I don’t know where he’s been/But he’s not our Jimmy Sinner/Because he’s so obscene.”
One of the more interesting stories I read from the past few weeks of Ozzy coverage was the impact he had on Lemmy Kilmister’s finances. While Ozzy is widely known as one of the Founding Fathers of hard rock and heavy metal (and deservedly so!), Lemmy played a huge role in creating and advancing the same musical genres. He was the bassist and singer of Mötorhead, and as the everyman who never stopped sitting at the end of the bar at the famed Rainbow Bar & Grill in Los Angeles, he was one of hard rock/metal’s greatest ambassadors until the day he died at the age of 70 in 2015.
Lemmy was also a respected songwriter, and when Sharon Osbourne, Ozzy’s wife and manager, approached him for help with the 1991 No More Tears album, Lemmy began writing lyrics. Ozzy used four of Lemmy’s songs (including the classic Mama, I’m Coming Home), and that album ended up going quadruple platinum. Lemmy, thanks to Ozzy, made all kinds of money for that short amount of work.
“I made more money with those four songs for Ozzy than in 15 years with Motörhead,” Lemmy said, via Far Out Magazine. “How absurd!”
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Facebook Reel of the Week
If you’ve ever watched Groundhog Day, you probably remember the Ned Ryerson character, played brilliantly by Stephen Tobolowsky. He’s the nerdy insurance salesman who claims he was a former classmate of Bill Murray’s Phil Connors. I’d never heard this theory before, but apparently, some people believe that Ryerson was actually the devil who procured Phil’s soul after the weatherman bought a huge bundle of insurance (including whole life!) from Ryerson.
Here’s the breakdown that tries to answer one question that ends up leading to a plethora more.
Do you believe in a 60/40 portfolio, or do you think more diversification is a better idea? What do you think about Morningstar’s study? Will it cause you to change anything in your financial life?
[EDITOR’S NOTE: For comments, complaints, suggestions, or plaudits, email Josh Katzowitz at [email protected].]