A recent analysis highlights the surprising long-term efficacy of a traditional 60% stock, 40% bond portfolio, demonstrating that it often performs comparably to an all-stock portfolio over 30-year periods. This resilience is attributed to 'volatility drag,' where the balanced portfolio's reduced drawdowns in adverse markets mitigate the compounding impact of losses, allowing it to maintain competitive returns without requiring outsized gains. For institutional investors, this suggests a 'slow and steady' approach can be a more sustainable and effective strategy for achieving consistent long-term growth by minimizing behavioral biases during market downturns.
Mark Hulbert This stock and bond portfolio won’t give you bragging rights — but it does make you money The surprisingly good long-term performance of a traditional blend of 60% stocks and 40% bonds Over most 30-year periods in U.S. history, a 60/40 portfolio either performed just as well as an all-stock portfolio or lagged behind it only slightly. A slow and steady approach to investing is better over the long term than “going for broke.” That’s because of a mathematical fact of life that Brian Chingono, Verdad Research’s director of quantitative research,” calls “volatility drag.” By that, he is referring to the percentage gain it takes to recover from a loss. “A portfolio that is down 10% in year one and up 10% in year two has lost 1% of value,” he wrote in a recent email to clients. Similarly, “a portfolio down 20% and then up 20% has lost 4% of value, and a portfolio down 30% and up 30% has lost 9%. Linear changes in volatility drive squared losses in total return.” The impact of volatility drag is evident in the surprisingly good performance of the traditional balanced portfolio of 60% stocks and 40% bonds. Consider that stocks have significantly outperformed bonds over the past two centuries. According to data from Edward McQuarrie, an emeritus professor at the Leavey School of Business at Santa Clara University, $1 invested in U.S. stocks in 1793 would be worth almost $40 million today, versus around $215,000 if that dollar had been invested in a bond-market index fund. Over most 30-year periods in U.S. history, a 60/40 portfolio either performed just as well as an all-stock portfolio or lagged behind it only slightly. As you can see from the chart above, the major exceptions to this tendency were the 30-year periods ending in the 1920s and those ending in the 1960s and 1970s. On average over the past two centuries, in fact, in just one of every three rolling 30-year periods did the 60/40 portfolio lag the all-stock portfolio by more than 1 annualized percentage point. In less than one out of five 30-year periods did the 60/40 portfolio lag by more than 1.5 annualized percentage points. Volatility drag is why the 60/40 portfolio could so frequently keep pace with the all-stock portfolio. Because the 60/40 portfolio in its worst years lost a lot less money than stocks did in their worst years, it didn’t need to make as much to hold its own. Newsletter honor roll It’s because of volatility drag that each year I create an investment newsletter honor roll. It highlights those advisory services, among those my auditing firm monitors, that have produced above-average performance in both up and down markets. It’s a rare achievement since the far more typical pattern is for advisers to be good performers in one kind of market and poor performers in others. Though these honor-roll advisory services rarely are at the top of the annual performance sweepstakes, they rarely are at the bottom either. While being “above average” may not seem all that exciting, these strategies are those you are more likely able to live with through thick and thin. They therefore often perform better over the long run than riskier strategies that perform well one year but fall off a cliff the next. If you disagree with this slow-and-steady approach, and instead think you can stomach greater volatility, then be my guest. My auditing firm tracks many additional newsletters that have performed better than the ones that made my honor roll — as you can see from these performance scoreboards. But don’t kid yourself about the nerves of steel that are required. Bear markets cause us to lose hope and sell stocks at what often proves to be at or close to the bottom. It’s hard to imagine today, with the stock market regularly setting new all-time highs, but at the bottom of the next bear market, you’ll wish you had paid more attention to slow and steady investing strategies. Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com More: Stocks in these industries are at higher risk of crashing over the next 2 years The analysis highlights the persistent long-term efficacy of a traditional 60% stock and 40% bond portfolio. This balanced approach has historically performed comparably to an all-stock portfolio over most 30-year periods in U.S. history, often lagging only slightly. Specifically, the 60/40 portfolio lagged an all-stock portfolio by more than 1 annualized percentage point in just one of every three rolling 30-year periods over the past two centuries. This surprising resilience is primarily attributed to "volatility drag," a concept where linear changes in volatility lead to squared losses in total return. By reducing significant drawdowns during market downturns, the 60/40 portfolio mitigates the compounding impact of losses, thus requiring less aggressive gains to maintain competitive long-term returns. For instance, a portfolio down 10% and then up 10% loses 1% of value. The article underscores that the 60/40 strategy's "slow and steady" nature reduces behavioral risks, such as panic selling during bear markets. While stocks historically generated significantly higher returns (e.g., $1 in 1793 to $40M vs. $215K for bonds), the balanced portfolio's lower volatility helps investors remain invested through market cycles. This consistency allows for superior long-term performance compared to riskier strategies prone to large swings and emotional exits.
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