60/40 Portfolio

Investment Summary
The 60/40 Portfolio invests 60% in stocks (represented by the S&P 500) and 40% in 10-year US government bonds. The 60/40 rule is followed by investors because stocks and bonds are often non-correlated assets. The correlation is not constant but during market crisis bonds and stocks are very non-correlated.

60/40 Portfolio is a simple investment methodology and experiences heavy losses during market corrections and market crisis.

MacroVar offers 200+ Investment Strategies with higher returns, lower risk and losses than the 60/40 Portfolio portfolio.

Investment Performance
Investment Return (?):9.60%Volatility (?):10.10%Sharpe Ratio:0.40Maximum Drawdown:-29.10%
Investment’s Fundamental Concept:
The 60/40 Portfolio invests according to the 60/40 rule 60% in stocks (represented by the S&P 500) and 40% in 10-year US government bonds. The reason people invest in both stocks and bonds is that they are often non-correlated assets. The correlation is not constant but during market crisis bonds and stocks are very non-correlated.

Benchmark Portfolio strategy Performance for the period 1973-2013 is displayed below:

Benchmark Portfolio

The 60/40 portfolio under performs relative to stocks but reduces maximum draw down from 50.75% to 29.15% which is considerable improvement.

The Global 60/40 Portfolio instead of investing solely 60% in stocks and 40%in bonds, invests 50% in US Stocks and 50% in foreign developed stock (EAFE) and 50% in domestic bonds and 50% in foreign 10-year government bonds.

Due to increased diversification the Global 60/40 portfolio increases returns, reduces volatility and improves the Sharpe ratio.

60/40 Portfolio Risk
Realized volatility fluctuates dramatically over time for both stocks and bonds assets. A 60-day rolling volatility calculation for S&P 500 and Barclays 7-10 Year Treasury Index shows that the volatility of a bond portfolio can fluctuate by over 400% over a 60-day period, and volatility of a US stock portfolio can fluctuate by almost 1000%.

This has dramatic impact on the risk profile of a 60/40 portfolio. The stock portion of a 60/40 portfolio contributes over 80% of total portfolio volatility on average and over 90% of portfolio volatility about 5% of the time during market crisis.

To maintain stable risk contributions a risk parity portfolio is preferred.

60 40 Portfolio Volatility Contributions

Other Investment Strategy Characteristics:
Investment Type:Buy & HoldInvestment Risk:4/5 HighBacktest Range:40-60 yearsRebalancing period:Monthly
Investment Strategy Markets:
  • US Stocks
  • US Bonds
  • Foreign Bonds
  • Domestic Bonds
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