Should You Ditch The 60:40 Portfolio For This Alternative?

The 60:40 portfolio is a popular strategy for investors who want a good tradeoff between risk and reward. But there’s probably a better one for that – and I’ll explain it in this post.

First, what’s the 60:40 portfolio and why is it so popular?

It’s an investment portfolio where 60% goes into stocks and 40% goes into bonds. The idea here is that stocks give you growth and bonds give you protection. So by combining the two, you can get a nice trade-off between risk and return. Generally, stocks and bonds tend to move differently (but not always). And this can help smooth the portfolio’s returns over time. The strategy is popular because it’s simple and it does ok in the long run. 

What’s the alternative?

The 60:40 portfolio is meant for investors who like simple strategies with stable and steady returns. So that’s the criteria I used to create the alternative, which also includes gold. By combining stocks, bonds, and gold, you could get a better balance between growth and protection. You’d have stocks for growth, bonds for income and safety, and gold to hedge inflation and store value. So you’d be more diversified than with the original 60:40 split.

In keeping with the simplicity criteria, the alternative portfolio has a third in each investment: stocks, bonds, and gold.  

How do the results stack up vs. the original 60:40 portfolio?

I used Portfolio Visualizer to backtest the results from October 2003 until now (April 2020). While that might seem like a random start date, it’s as far back as the data goes. I used the iShares Core US Aggregate Bond ETF (AGG) to track a massive amount of US bonds – and it only launched in late September 2003. For stocks, I used the SPDR S&P 500 ETF Trust (SPY) to track the US stock market. Gold was easy, I just used the gold price. And there’s plenty of data for that. 

So without further ado, here are the results for a $1,000 investment in the original 60:40 portfolio (blue) and the alternative (black). Oh, and I almost forgot, both portfolios were rebalanced yearly to get them back to their target splits. 

Looking at the above chart, the alternative portfolio grew by more than the original. Not only that, but the returns do look a bit smoother overall. The table below digs deeper into the numbers. It shows the alternative had lower volatility (risk) and a higher yearly return – i.e. a higher Sharpe ratio. But the best feature of the new portfolio is that it was only down 10.25% in its worst year. (That was last year, in case you’re wondering). 

So should you ditch the 60:40 portfolio?

The 60:40 portfolio seems worse than this alternative one – at least based on these results. By throwing some gold into the mix, you could be better protected in the long run and get better returns. And if you want to add extra rocket fuel, you could always throw in some bitcoin too.

As for owning gold, you could consider the SPDR Gold Shares (GLD) as an ETF option. Or check out BullionVault if you’d rather store gold in a vault. 

Key points

• The 60:40 portfolio is a popular strategy because it can balance growth with protection.
• But you could probably do better on both fronts by adding some gold to the mix.