One Chart May Illustrate the Trouble with a 40% Bond Allocation

As rates have steadily fallen since the 1980s, fixed income returns have dwindled … and dwindled … and dwindled. The chart below may put the diminishing return stream from bonds in perspective.

It also invites several questions: With interest rates still near historical lows, what can investors expect from bonds in the next decade? And, if return projections are low, can investors still afford to dedicate 40% of their portfolio to the asset class, or is the traditional 60/40 stock and bond allocation mix due for a rethink?

We believe such questions will be some of the most important for advisers and other asset allocators to consider over the next decade.

Bonds will continue to play a role in diversified portfolios, providing downside protection and dampening volatility. But with the historically low interest rate environment making competitive returns from the asset class challenging, investors may benefit from redirecting a portion of their fixed-income allocation into equities to potentially improve portfolio returns. The challenge is how to increase equity exposure without moving too far up the risk spectrum.

In our latest investment brief, we explore the problems with the 60/40 allocation, and a potential solution for investors.

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The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

¹For the data in the chart, we are showing 40 years because interest rates peaked in the Fall of 1981. In the first 10-year period, as indicated, bond returns were very high because interest rates were dropping from very high rates. In the next three 10-year periods, rates were still declining but at a slower rate, causing bond returns to decrease.

The Bloomberg Barclays U.S. Aggregate Bond Index is an index comprised of approximately 6,000 publicly traded bonds including U.S. Government, mortgage-backed, corporate, and Yankee bonds with an approximate average maturity of 10 years.

The annualized rate of return is a process for determining investment returns on an annual basis. The rate of return looks at gains and losses on investments over varying periods of time, while the annualized rate looks at the returns on a yearly basis.

Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account.

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All data is presented in U.S. dollars.
Cash is cash and cash equivalents.
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