An edited version of this blog was originally published in the Financial Times on 22 December 2020.
In a year when investors questioned whether a traditional mix of stocks and bonds, the so-called 60/40 portfolio, is obsolete, the closely watched benchmark1 for the strategy delivered 11% returns as of 15 December. This follows three decades of annualized returns of 7.6%, despite ever-falling interest rates and concern that the secular bull market for interest rates was over. The new year will inevitability bring new concerns for bonds, and the question remains whether 60/40 portfolios can continue to deliver a fitting return for investors, and more specifically whether bonds offer an effective complement to riskier asset classes, like equities.
Returns over the secular horizon may be harder to achieve, but bonds will still play a very important role in portfolios. Indeed, bonds have offered diversification and volatility suppression (see Figure 1) in multiple-asset portfolios, which could be especially beneficial in the years ahead as a bumpy recovery and secular shifts in the global economy create much greater volatility than the market has experienced over the last decade.
Figure 1: All-stock portfolios tend to have higher volatility than stocks and bonds together
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