The 60/40 Portfolio in 2025: What to Expect

Key Takeaways

• The 60/40 portfolio is the most popular portfolio because it strikes a nice balance between your risky assets and your safe assets.
• In the 60/40 portfolio, about 90% of the risk comes from the stock side.
• The theory behind why the 60/40 works is the correlation between stocks and bonds being negative when stocks are experiencing big drawdowns. During the pullback in the stock market in 2024, bonds did really well.
• Investors may want to add other types of securities to the 60/40 because of what we saw in 2022, when it was down almost 20%. The most popular change that people are talking about when it comes to shaking up the 60/40 portfolio is usually around alternatives.
• In 2025, investors should pay attention to inflation. With high inflation, rates are going to rise. Tariffs in 2025 could have a real impact on inflation.
• As long as investors keep the time horizon in mind, the 60/40 portfolio is going to serve investors well over the long term.

Susan Dziubinski: I’m Susan Dziubinski with Morningstar. Just a couple of years ago in 2022, the 60% stock/40% bond portfolio seemed to fail investors, as both stocks and bonds finished the year in the red. But that 60/40 mix bounced back in 2023.

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So, how did it do in 2024, and what might investors expect in 2025? Joining me to answer those questions is Jason Kephart. Jason is director of multi-asset ratings at Morningstar.

Good to see you Jason. Thanks for being here.

Jason Kephart: Thanks for having me, Susan.

Why the 60/40 Portfolio Is So Popular

Dziubinski: Jason, let’s start off with a reminder for viewers about what the 60/40 portfolio is and why people in the industry like you and me talk about it.

Kephart: It’s the most popular portfolio because it really does strike a nice balance between your risky assets and your safe assets. It’s 60% stocks, 40% bonds. There’s a lot of permutations you can do within those confines, but generally that’s what we’re talking about. And when you have a moderate risk tolerance, this is typically the portfolio you’re going to end up in.

The 60/40 Portfolio Performance in 2024

Dziubinski: Talk a little bit about how that 60/40 mix did in 2024.

Kephart: 2024 has been great for the 60/40 portfolio. It’s up over 15% for the second year in a row. Both stocks and bonds have had positive returns. And most encouragingly, earlier this year when we saw some stock market volatility, bonds acted like bonds again and provided that defense and that flight to safety that we like to see. So they kind of really balanced each other nicely. In the previous years, like 2021 and 2022, fixed income was really challenged by rising interest rates, so it didn’t really provide that defense, which is why you’re hearing so much of the “death of 60/40″ rhetoric out there.

How Stocks Drove the Success of the 60/40 Portfolio

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Dziubinski: Break down that performance in 2024 a little bit. Equities, of course, probably really drove it more than bonds, right?

Kephart: Yeah. In the 60/40 portfolio, mathematically, about 90% of your risk is going to come from the stock side. It’s just so much more volatile than the bonds. And in 2024, yeah, stocks have been a great investment. The S&P 500 is up over 20%. It’s second year in a row it would be up more than 20%. That’s the first time that’s happened since the 1990s. So people should be pretty grateful for the performance they’ve seen there.

The Correlation Between the Bond Market Rally During the Stock Market Pullback in 2024

Dziubinski: Although the stock market had another great year, as you alluded to, we did experience a little bit of a pullback in stocks in that July-August period of 2024. How did bonds do then?

Kephart: Bonds did really well. We saw bonds rally, which is what you like to see when stocks are falling off. That’s kind of the theory behind why the 60/40 works so well and has worked so well historically: that classic correlation between stocks and bonds being negative when stocks are experiencing big drawdowns.

How Attractive Is the 60/40 Looking Into 2025?

Dziubinski: Given where we are now, where interest rates are and where equity market valuations are at the end of 2024, how attractive is that 60/40 portfolio as we’re heading into 2025?

Kephart: I think you always want to keep a longer mindset with a 60/40 portfolio, right? In 2008, it lost more than 30%. 2022 was down almost 20%. So this is not a one-year investment. This should be a five to 10 years minimum time frame. But having said that, yes, stocks are more expensive now than they were a year ago. Bond yields are starting to come down. The CPI print in December was kind of in line with expectations, which leads people to believe the Fed is going to stay on its rate-cutting kind of schedule. So that does mean bond yields will be lower, so returns should be lower. So you might want to check your expectations a little bit, and another 15%-plus return might not be in the cards, but in the end it might. But there are some risks, I think, that are really pertinent for investors to keep in mind in 2025.

How Inflation Stokes Fears Around the 60/40

Dziubinski: There’s been talk, as you mentioned, in the industry about the 60/40 portfolio: maybe it should branch out, maybe it should add other types of securities to it. Why the talk?

Kephart: Basically because of what we saw in 2022. That’s when everyone’s fears materialized. And the real killer for the 60/40, which is what I think people should really be keeping in mind in 2025, is inflation. When there’s high inflation, that means rates are going to rise. That means bonds are going to lose money, and that typically is not very good for stocks, especially when valuations are high. And whatever happens with tariffs in 2025 could have a real impact on inflation. And so that’s, I think, the one big risk out there that investors should be aware of. When it comes to diversifying the 60/40 beyond stocks and bonds, a lot of times people want to add complexity, things like systematic trend following, which did work really well in 2022. But there’s a lot of manager dispersion there, so picking the right manager is really hard. And also it could be very expensive insurance if it doesn’t work out. It does really well when stocks and bonds are both losing money, but that’s rarely going to happen. And in the meantime, these fees are north of 1% on this, so you could be adding a lot of expensive insurance for something that you might not need.

What Are Popular Additions to the 60/40?

Dziubinski: And would you say that that’s been the most popular change that people are talking about, or have there been others that people are advocating for when it comes to shaking up or adding some branches to the 60/40 portfolio?

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Kephart: I think it’s usually around alternatives. I do think one thing that people might want to think about is international equities. US stocks have outperformed the rest of the world again this year, so maybe adding a little bit more to international equities, which are trading at much cheaper valuations, might be a way to add some more resilience to the portfolio. But I think everyone should be very careful before diving into the alternatives bucket. It’s very complex. People often say it might only be 10% of your portfolio, but it might be 80% of the time you spend doing research. And so that trade-off might not be worth it for a lot of people, especially if you have that five- to 10-year time horizon that, if there is some trouble in one year, you’ve got time to make it up.

Dziubinski: Yeah, you’ve got time to ride out the volatility, plus then, with the alternatives you have higher fees, as you said, right?

Kephart: Higher fees, potentially less liquidity, much more complexity. And things like systematic trend or market-neutral strategies, much less predictable.

Is the 60/40 Portfolio Broken?

Dziubinski: Is it fair to say that you, Jason, believe that the 60/40 portfolio is not broken and that it does not need fixing?

Kephart: I’m a 60/40 truth-er, Susan. I think the 60/40 portfolio is just fine the way it is. As long as you keep the time horizon in mind and you’re not using it to pay for something next year, I do think it’s going to serve investors well over the long term. There may be some bumps in the road. Like I said, inflation, I think, is the real risk to care about. And in terms of maybe diversifying, commodities or something that react really well to unexpected high inflation. But I do think like, over the long run, it’s a great portfolio. It’s very resilient. We don’t expect inflation to be consistently high. If not, we probably got a lot of other things to worry about than our 60/40 portfolio, but knock on wood.

Dziubinski: All right. Jason, thank you for your time. Happy new year. And I look forward to talking with you more about 60/40 in 2025.

Kephart: Thanks, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch Ask Your Advisor These Questions Before Investing in Defined-Outcome ETFs for more from Jason Kephart.